SA’s economy grew by 1.2% in last quarter of 2021

SA’s ‘core inflation measure could…see some upward provision as high international oil prices…seep into the rest of the economy, because…businesses would have to put up prices on the back of transportation costs’: Sanisha Packirisamy – economist, Momentum Investments

FIFI PETERS: Well, some breaking news has just come in from the US. President Biden has confirmed that the country will ban Russian oil, gas and coal imports. We’ve been talking about the possibility of this ban for some time, but the [US] president a few moments ago confirmed that the US would go ahead with this position, which it believes will squeeze Russia’s economy a lot more.

But it is also a position which has added to pressures on the oil price of late, with question marks as to who else will follow the US in instituting a complete ban on Russian imports. This may or may not have implications for South Africa’s economy, which today Statistics South Africa showed grew by 4.9% in 2021.

Perhaps to speak on the GDP figures that were released and some of the latest developments, particularly in the Ukraine and Russia, and now this ban, and to speak about the impact that this will have on our growth going forward, we are joined by Sanisha Packirisamy, an economist at Momentum Investments.

Sanisha, thanks so much for your time. I’m wondering if you would’ve seen the flash headline coming out regarding that ban by the US on Russian imports. I’ve just seen it on my phone. Can you talk to us about this and how much of a problem this could be for the global economy and South Africa’s economy?

SANISHA PACKIRISAMY: Hi Fifi, and hello to all of your listeners tonight. Yes, we did see that news headline flashing. It’s quite disturbing, given that the Russian oil and gas market is quite pivotal in terms of global supply, especially for the European markets. We do believe that having sanctions imposed against Russian oil – and now also spread to the gas and the coal sector – can have significant implications for global commodity prices, in particular oil prices. International oil prices could feed through into much higher inflation for South Africa in the near term. Of course, if these sanctions are done on a prolonged basis, this could start feeding through into core underlying inflationary pressures, which could have different implications for monetary policy.

I think from the growth angle we would also see disposable incomes being hit by higher oil prices as consumers now have to fork out more for energy prices; as a result they could also have a dampening impact on growth.

FIFI PETERS: Just looking at commodity prices, as you did make reference to them, there are very strong gains that we have seen from this complex in recent days – literally recent days. Also what we saw in our GDP figures that were released by Statistics South Africa was the advancement of the mining sector as a whole in 2021, growing some 11.8% or so. Given the potential uplift that the commodity prices presently could bring for some of our miners, are you expecting a similar kind of performance then for growth of South Africa’s mining sector for 2022 if the situation around the Russian conflict doesn’t subside?

SANISHA PACKIRISAMY: Sure. We are expecting greater performance to come through from the mining sector. If we look at where mining ended the year off, last year, we are actually still below the pre-pandemic levels. But, given where commodity prices are, and in particular looking at South African exported commodity prices, our terms of trade have now reached the prior peak and that’s very good news for our mining sector. I think [that’s] one of the reasons why in some instances our rand has been partially sheltered from the geopolitical tensions playing out, given that we have actually had the benefit of higher commodity prices helping our currency as well.

FIFI PETERS: Commodity baskets are spreading very wide, not only to what to the miners mine, but also to what farmers grow and harvest, speaking to the performance that we saw coming from the agricultural sector, which I believe came in after mining in terms of growth for 2021. Just speak to us about how you’re feeling about agriculture, and perhaps even the other important sectors for South Africa’s economy and what the shape of those sectors may pan out to be this year.

SANISHA PACKIRISAMY: Sure. If we look at the 10 sectors that contribute on a supply-side basis, the best-performing sector actually was the agricultural sector. In terms of its level of output, it is now 33% above pre-pandemic levels. So it’s by far the best performing sector. Unfortunately the agricultural sector is still small in terms of its direct impact on GDP, so it still only accounts for 1% of GDP and a small proportion of total employment in South Africa.

There were concerns going into the end of last year that higher than expected rainfall would cause flooding damage to crops, but when we received the final crop numbers from the crop estimates committee in the middle of February, we actually saw that many crops had exceeded their expectations. As a result we actually saw quite a positive impact coming through from the agricultural sector.

If we look across the board, I think the most worrying sector at this point in time is the construction sector. For the last six years we actually had a negative contribution coming through from the construction sector and, if we look at forward-looking indicators from the Bureau for Economic Research, in terms of the confidence indices for the construction sector these remain still in negative territory – and quite deeply so. A very high percentage of construction companies are suggesting that there’s just insufficient work out there, and that has been bogging down that industry for some time.

In terms of the positive contributors, we’ve still had a positive contribution coming through from Finance and the government, and personal services in terms of manufacturing, utilities, trade and transport. These are still operating below pre-pandemic levels.

FIFI PETERS: That construction sector, which was the only sector to post a contraction in 2021, worries me because I thought we’ve got a whole lot of infrastructure spending and projects on the go. You hear national government saying that the work is being done, and yet you’ve got a sector that is seemingly showing something else. It is quite troubling, but perhaps there are longer lead times and we’ll have to see how things pan out this year.

Before I let you go, Sanisha, on the point of inflation I understand that a number of forecasts have inflation pegged at 4.9% for 2022. But, given what we are seeing right now with the increase of prices across the board at rapid rates, is that inflation forecast set in stone?

SANISHA PACKIRISAMY: I would say that there is a lot of upside pressure being posted in the headline inflation number in South Africa. At this stage the impact on core inflation is still relatively unknown, because we don’t know how long the sanctions will be imposed for, and there will be a structural impact on the international oil price. Internally we upgraded our inflation forecast, just before the latest announcement was made, from 4.9% to 5.2% for this year. That was largely with terrifically high international oil prices, and embedded in there was a forecast of $82 on average for international oil prices for this year.

Given the recent announcements that we’ve both seen flashing in the headlines, this could suggest even further upward pressure for near-term inflation. I think, going forward in the medium to longer term, we will still see more sanguine inflation outlooks, except for the fact that, if we do get further sanctions, if we see the Asian markets and European markets following suit, we could have a longer-term structural impact on oil prices.

That would then mean that our core inflation measure could also see some upward provision as high international oil prices then seep into the rest of the economy, because that would mean that businesses would have to put up prices on the back of transportation costs. That would then become a self-fulfilling prophesy in terms of higher inflation coming out of that. With higher core inflation measures, that would put our Reserve Bank on higher alert in terms of trying to curb inflationary pressures underlying in the economy, and trying to make sure that we don’t see inflation expectations running out of control.

As as a result of that we may actually see interest-rate hikes being brought forward in the cycle, and we may even see a higher terminal interest rate if we start seeing inflation expectations becoming de-anchored on the back of the status quo.

FIFI PETERS: Yeah. Interesting times we are living in, certainly. Sanisha, thanks so much for that analysis. Sanisha Packirisamy is an economist at Momentum Investments.

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