September 27 2024 19:00
This is a guest piece by Raul Flores, CEO of TITAN Property Group.
Globally, inflation is slowing and nearing targets and, because of these gains, large international banks have lowered their interest rates. The European Central Bank announced another cut recently, the Bank of England eased off in August and the US Federal Reserve reduced its rates again.
The US dollar has cooled off in recent months, providing some respite for other currencies, including the rand. Despite these welcome developments, the Monetary Prediction Committee (MPC) of the SARB maintains that central banks are moving carefully and policy stances remain tight. Economic activity in major economies is still resilient as inflation eases. Underlying measures of inflation have also fallen less than headline, primarily because of elevated housing inflation and wage growth.
According to Lesetja Kganyago, Governor of the SARB, caution is necessary, because of the difficult and unpredictable geopolitical environment, with risks of inflationary shocks through trade restrictions and supply chain disruptions, among other factors. Despite global conditions becoming more favourable, there are still risks.
“A soft landing is looking more likely after the worst inflation surge in a generation, but it is not inevitable,” he said. This was as the financial market volatility of early August was an uncomfortable reminder of the fragilities and uncertainties in the system.
Headline inflation for August was 2.2%, in both the Euro area and the UK and 2.5% for the US, all against targets of 2% with central banks still approaching the endgame with caution. SA’s annual inflation rate slowed down for the third month in August 2024, easing to 4.4% year-on-year from 4.6% in July. This latest figure came in below Bloomberg market consensus of 4.5%, matching the lower end of expectations.
However, according to the MPC, SA’s output was marginally below expectations for the first half of the year. Further improvements in the second half are expected with growth of 0.6% in both quarters; reflecting rising confidence partly due to a stable electricity supply. Extra spending withdrawals from the new Two-Pot retirement system are expected, although some of these funds will be absorbed by debt repayments and tax.
For the medium term, growth projections have once again edged higher. The upgraded forecast is premised on better-functioning network industries, especially electricity, alongside broader reform momentum. As a result of potential higher growth in the forecast, supply and demand remain balanced even as growth accelerates. The pace of growth nonetheless remains below longer-run averages of around 2%. A concern is investment, which has been contracting for four consecutive quarters. A stronger investment performance is a pre-requisite for sustained higher growth and although the SARB expects an investment recovery, its scale and speed will be a key indicator of SA’s longer-run economic prospects. The risks to the growth outlook are assessed as balanced.
The 3-year inflation low of 4.4% in August, suggests this progress will be sustained, with inflation contained below the 4.5% midpoint through to the end of the forecast horizon in 2026. In the near-term, the MPC predicts a continued dip in headline inflation, supported by the stronger exchange rate and lower oil prices. The implied starting point of the rand is R18.04 to the US dollar; an appreciation of nearly 2%, relative to the July anticipated growth of 0.6% in 2024 quarter, versus an outcome of 0.4%. However, first quarter growth was revised up to 0% from -0.1%, thus the level of GDP was only 0.1% below expectations in 2024 quarter, indicative of the quarter-on-quarter, seasonally adjusted measure. The year-on-year rates are 1.4% and 1.7% for 2024 quarter three and 2024 quarter, respectively. The estimated effect on GDP of load shedding has also been cut back. This contributes to fuel price deflation which would help keep headline below 4% through the first half of 2025.
Lower headline inflation also reflects a better food price outlook with inflation for this category below the midpoint through 2025 and 2026. However, these benefits are partly offset by higher electricity prices with an expected inflation rate more than double that of headline.
According to Kganyago, a trajectory of slightly less than 4.5% over the medium term is forecasted; primarily because of the rand/dollar exchange rate, the effects of which would mainly be felt as a result of import prices. Services inflation, meanwhile, is expected to stabilise near the midpoint of early 2025; partly reflecting subdued housing inflation, which has accelerated less than expected this year. Lower inflation expectations also contribute to the improved services outlook. According to the latest survey, these expectations are still in the top half of the target range, at 4.8% for both 2025 and 2026, slowly moving in the right direction. As long as headline inflation stabilises at lower levels, further progress in re-anchoring expectations are expected.
Against this backdrop, the MPC decided to reduce the policy rate by 25 basis points to 8% per annum, with effect from 20 September. MPC members reached consensus on 25 basis points as opposed to 50 with the starting point for July’s forecast being R18.35 per US dollar.
Housing inflation, surveyed quarterly, slowed unexpectedly from 3.3% to 2.9% during June. Market-based measures of inflation expectations have also moderated. Since the previous MPC meeting’s shorter-term expectations (5 years) have declined to 4.3%, while longer term expectations (10 years) have fallen to 5.3%.
The forecast sees rates moving towards neutral next year, stabilising slightly above 7%. However, the rate path from the Quarterly Projection Model remains a broad policy guide, changing from meeting to meeting. Decisions of the MPC will continue to be data dependent and sensitive to the balance of risks versus outlook.
There are scenarios where inflation could undershoot the baseline forecast, if oil prices are lower or the exchange rate appreciates further. Conversely, inflation could be higher than the baseline forecast given scenarios of higher housing costs, larger electricity price or wage increases outrunning inflation and productivity growth.
Global conditions pose additional challenges. Geopolitical risks are heightened and could generate economic shocks. Policy uncertainty is also elevated in various parts of the world. Both trade restrictions and debt levels are rising and could continue to do so. This could add to inflationary pressure to the world economy, generating tighter financial conditions for SA.
For the time being, SA assets have performed relatively well. The rand has strengthened during the year, more than most peer currencies, while long-term yields have moderated and spreads over US rates have narrowed. These reversed some deterioration experienced since 2020. The MPC’s main contribution is to deliver low and stable inflation with well-anchored inflation expectations.
The yield on a R2035 bond moved from about 11.4% at the start of 2024 to a peak of 12.5% in April and then downwards to 10.3% as of mid-September. The MPC recommends additional measures to improve economic conditions and benefit the property market; reaching a prudent public debt level, further repairing and strengthening network industries, lowering administered price inflation and keeping real wage growth in line with productivity gains.
Looking ahead, the need to adapt and stay flexible is more crucial than ever. At TITAN, we’re committed to creating long-term partnerships, staying in tune with global financial tendencies and SARB’s economic predictions.
247@propertyflash.co.za
