Business Report’s editor Adri Senekal de Wet interviews Harmse, an economist at CH Economics and lecturer at the School of Commerce at the Stadop Multiversity.
BUSINESS Report editor Adri Senekal de Wet interviews Chris Harmse, an economist at CH Economics and lecturer at the School of Commerce at the Stadio Multiversity.
Please explain the reason for higher inflation in South Africa (SA)?
The main reasons for the higher increase in the inflation rate in SA is due to cost push factors.
The three main items in the inflation basket, making up more than 55 percent of the inflation basket, have increased considerably over the last year.
They are food and non-alcoholic beverages, making up 17.14 percent of the basket, which have increased by 6 percent year-on-year (y-o-y) at the end of April 2022, housing utilities (24.5 percent of the basket), increasing by 5 percent, but the sub-index, electricity and other fuels (3.7 percent of the basket) has increased by 14.1 percent. The third main item in the inflation basket is that of transport (14.6 percent weight), increasing by 14.7 percent in April (y-o-y). As a sub-index, fuel (4.8 percent) of the basket has increased by 29.2 percent over the year. This component alone, therefore, contributing towards 1.4 percent of the current inflation rate of 5.9 percent.
Higher interest rates: How will this help for a lower growth in the rate of inflation?
Higher interest rates, per se, will not help to lower the rate of inflation and may even impose an extra cost to businesses in the value chain. It is, however, clear to me that the Monetary Policy Committee feels strongly that higher interest rates will help towards one of its main goals: that of protecting the global value of the rand (the exchange rate).
The standpoint is that higher interest rates will keep the rand at lower levels and, thereby, prevents further import inflation. Here is a question of choice between domestic economic growth and keeping inflation running away.
Will higher interest rates support economic growth in SA?
No, it will never. Economic theory tells as that if the inflation rate increases fast, it normally leads to what is called stagflation, meaning high levels of inflation with low levels of growth – even negative growth.
For instance, in the US, the inflation rate had increased strongly from 4.2 percent in April 2021, to 8.5 percent in March. This forced the US Federal Reserve (Fed) to apply stricter monetary policy by stopping its buying back of bonds in the market, restricting money available for the banks to lend out.
Even this action alone caused the US economy’s gross domestic product growth to contract by -1.5 percent during quarter one. The Fed only now has started to increase rates quickly in the US, and this may push the US into a recession during quarter two. So the world, including SA, is in a dilemma and we are simply following the global movement towards stagflation due to the sharp increase in oil prices (even before the war) as well as food and other prices after the war.
Higher fuel prices combined with higher interest rates? Please explain the impact of this on the economy and for the poor
This will be a main factor for stagflation and will be the direct effect of an expected recession. It is always the poor that suffers as it also will include unemployment. SA employment data for quarter one will be released today and it is expected that the unemployment rate will increase even further from 35.2 percent to 35.7 percent.
The unemployed clearly will suffer more if inflation continues to increase, given that fuel and transport play a big role in their daily attempt to survive. Poorer people spend a bigger percentage of their income on transport. It is, therefore, clear that it weighs a lot more in the baskets of the poor and the people in the rural areas.
Middle-to-lower income people will suffer also as many rely on micro-lending. Micro-lenders will also see the opportunity to increase their interest rates and, in some cases, by even more than the increase in the repo rate. This will put more pressure on this income group, which will of course experience the bulk of the double whammy: namely, higher interest rates and the cost of living.
How does SA’s inflation rate compare to similar developing countries?
South Africa’s inflation rate (5.9 percent) compares very favourably with other similar emerging market economies. For instance, the inflation rate in Brazil has increased from 7.8 percent a year ago to the current 12.2 percent. India’s inflation rate similarly has increased from 4.3 percent in October 2021 to the current 7.8 percent. Egypt’s inflation rate has accelerated from 5.6 percent in October to 13.1 percent in April 2022. The main reasons for the sharp increases in these countries inflation rates is the sharp increase in the oil prices, from just more than $60 per barrel in October 2021 to the current $117 (R1845).
What are your views on the global impact of rising inflation on the SA economy?
Global rising inflation will see a similar impact on the South African economy as during the 2009 sub-prime crisis that led to the biggest world recession in 100 years.
Central Banks across the world are likely to raise their interest rates sharply over the next six months. South Africa is likely to follow and I expect the repo rate to increase by at least another 100 basis points.
It seems that the Russia-Ukraine war will last much longer than expected and one can expect oil and food prices to escalate even more. A weaker world economy may also start to impact South Africa’s exports, especially if the demand for resources start to dwindle heavily.
Can the government do something about the increasing fuel prices?
I believe that the government has no choice than to continue to subsidise fuel prices by the 150 cents a litre cut in the fuel levy. It will have to continue with it just as with the special grant of R350 per month for the unemployed. SA simply cannot increase other taxes to compensate and will have to spend less on other luxuries in governmental departments like entertainments, flight tickets, accommodation, bodyguards etc.
If the fuel price increased by R3.50 per litre at the beginning of June, then the price for 95 petrol in Gauteng will be R25.34 per litre. This is R8.21 per litre more than the R17.13 per litre a year ago. This is 47.9 percent higher. This will push up the inflation rate alone by 2.2 percent. Therefore, the SA inflation rate easily can go up to levels close to 8 percent within the next few months.
– BUSINESS REPORT
