The SA economy is being helped along by lower inflation at the retail level
The SA economy did surprisingly well in the fourth quarter of last year. GDP grew at an annual rate of over 3%. The demand side of the economy did just as well, growing at the same rate as supply, which was augmented by a strong seasonal recovery in agricultural output. Demands from households, which account for 60% of all spending, increased by an annualised 3.6% in the quarter, well above recent trends, while expenditure on capital goods increased even more robustly by 7.4% annualised. Imports increased significantly faster than exports, so reducing GDP growth, but found their way into increased holdings of inventories – enough to offset the impact of the growth in imports (up 23%) and the negative trade deficit on GDP. Imports add to supply – the increase in inventories adds to demand.
The strength in household spending – essential to any cyclical recovery – was reflected in a strong recovery in retail sales volumes. These were growing at close to a 6% annual rate in the fourth quarter. Such growth was assisted by low rates of retail price inflation. The prices of goods and services at retail level were largely unchanged in the fourth quarter; hence sales in constant prices were rising as rapidly as were sales measured in prices of the day. Clearly consumers were getting the benefit of the end of the drought (lower food prices) and the stronger rand and presumably strong price competition at retail level.
The figures below tell the story of price competition and its effects. Extrapolating recent trends suggests that prices at retail level will be rising at a very slow rate in the months to come. The recent strength in the rand will be adding to these disinflationary, if not deflationary pressures in the months to come and will help to stimulate household spending. A time-series forecast of retail volumes indicates that they could retain a brisk growth pace of around 6% over the next 12 months.
Retail sales and price statistics are available only up to December 2017. Two more up-to-date hard numbers have been printed for the February 2018 month end, that is for vehicle sales and the cash (notes and coin in circulation) supplied by the Reserve Bank. We combine these indicators into a Hard Number Index (HNI) of economic activity in SA. As shown below, this index may be regarded as a good leading indicator of the business cycle in SA (itself only updated to November 2017).
As we show in figures four and five, according to the HNI, the economy has picked up some positive, though modest momentum, consistent with the 3% GDP growth realised in the fourth quarter.
The growth in the components of the HNI are shown below. As may be seen both the vehicle and the real cash cycles have recovered from their low points of mid-2017. However the impetus for the economy provided by cash in circulation and vehicle sales volumes is forecast to wane somewhat in the months ahead – absent any stimulation from lower interest rates.
