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Economic trends: The consumer is still king

By Craig B Pheiffe

Recently released consumer and producer inflation data (for May) was again better than expected, prompting market economists to further reduce their expectations for inflation and interest rates later in the year. The latest monthly Reuters economic poll released on 1 July reflects this revised thinking and market watchers are now evenly split on the prospects for an interest rate hike later in the year. The renewed strength of the rand in late June and early July has reinforced the thinking that inflation will continue to be restrained in 2004 and 2005 and that a tightening of monetary policy will not be required. Tito Mboweni, the Governor of the SA Reserve Bank, has been fairly adamant that CPIX, the Bank’s target inflation measure, will not exceed the upper target limit of 6% this year. Until fairly recently market consensus had indicated a brief period of above-limit CPIX growth later in the year that would necessitate a small measure of policy tightening. The strong rand, some reprieve on the oil price front and the slower-than-expected pick up in inflation so far this year has changed the perceptions of some.

The Bureau for Economics’ (“BER”) Q2 inflation expectations survey, released at the time of the June Monetary Policy Committee (“MPC”) meeting, shows that financial analysts expect the CPIX to average 5,1%, 5,6% and 5,6% in 2004, 2005 and 2006 respectively. These numbers mirror the expectations portrayed in the monthly Reuters survey and indicate that those closer to the markets are fairly optimistic on the inflation outlook. That optimism is not entirely shared by “Business people” and “Trade union officials”, the other two categories of respondents in the BER’s inflation expectations survey. The business respondents expected a 6,6% to 7,1% range for CPIX over the next three years, while the labour respondents expected inflation to average 6,4% to 6,5% over the same period.

While not substantially so, all of these estimates for CPIX are above the upper limit of the inflation target. The Governor places substantial emphasis on inflation expectations as a self-fulfilling inflation mechanism and he remains concerned that increases in labour remuneration continue to be in excess of productivity gains, and this has implications for future inflation. Figures quoted by the Governor in his MPC statement indicate that wage settlements in collective bargaining agreements are expected to average between 7,5% and 8,5% this year. While this is lower than the increase in the average nominal remuneration per worker of 8,6% in 2003 and 9,5% in 2002, it will nevertheless add to the pressures on domestic production prices. Wage increases are just one link in the inflation chain but overly-high inflation expectations do leave the door open for the Governor to tighten policy, even if it is only for a short period to moderate inflation expectations.

The argument of “will he or won’t he increase interest rates” is largely academic. Any tightening in monetary policy in the near future is likely to be limited. South Africans will continue to enjoy a level of interest rates substantially lower than those that have historically prevailed in this country. Following government’s fiscal prudence over the last decade and the introduction of the inflation target, the “Ten years of freedom” slogan can be extended to include the freedom from excessive inflation and highly-restrictive interest rates.

Consumers are enjoying this newfound freedom and are exercising their right to exercise their wallet. Consumer confidence is at an all-time high and this is reflected in the FNB/BER consumer confidence index which jumped to +17 points in Q2 from -10 points in Q1. In June new passenger vehicle sales were 30% higher than in May and 16% higher than in June of the previous year. For the first half of this year, cumulative sales of new passenger cars were 20% higher than over the same six months of last year. The strength in consumer spending has also been manifested in the sales of retail goods. The methodology of collecting retail sales data has recently been revised by Statistics SA but the latest available numbers continue to portray fairly robust sales growth. In January, February and March, real retail sales grew at an annual pace of 6,7%, 7,1% and 5,5% respectively. Consumer borrowing has also increased as interest rates have been reduced and this has helped to finance consumption to a degree. Ultimately, the increased pace of borrowing will have to be reigned in by higher interest rates but for now consumers are enjoying their new “freedom”. Local retailers are consequently just as jubilant.

Craig B Pheiffer is Chief Investment Strategist at Sasfin Frankel Pollak Securities. For information on the impact of these trends on specific shares, contact him by e-mail on; cpheiffer

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The Big Change is a business strategy blog and newsletter published by Arthur Goldstuck, managing director of World Wide Worx, a leading technology research organisation based in Johannesburg, South Africa.

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