With SARB Governor Mboweni yet to be confirmed for a third term of office this August, the Monetary Policy Committee will later this week once again bend its collective head over a recurring difficult decision worthy of a Hamlet.

To cut or not to cut.

It hasn’t been helpful that labour unions have been calling for a two percent rate cut (in lieu of a four percent cut), putting undue pressure on our independent central bank and presumably raising internal hackles.

But it certainly would be helpful if CPI inflation could this week fall below eight percent, as expected, and if PPI inflation could enter deflation (a real possibility). Also, even retailers supposedly are showing nearly seven percent volume declines of late (though few retailer results seem to echo this), hinting at a further broadening of recessionary conditions.

Car manufacturing 50 percent down, manufacturing output outside a few resilient sectors 25 percent down, residential building plans passed 50 percent down and non-residential building plans also getting there, mining output these past two years 20 percent down. No wonder the unions are getting restless.

BER business opinion surveys show severe downward pressure on goods prices to be occurring and in the pipeline. This, along with the firmer rand near 8:$, provides ever more reason to believe our CPI inflation will fall towards five percent next year.

Salary settlements

As it does, wage and salary settlements should follow.

Indeed, something dramatic has apparently already happened as the SARB has reported a sizeable fall in disposable income in recent months. As wage settlements have remained high, modeled on last year’s inflation surge, it can only be bonuses, overtime and other forms of flexible income getting it in the neck.

Thus wage bills are being managed closely. Unions demanding too much will merely assure that their marginal members lose their work. Not a happy prospect, but helpful in getting wage settlements eventually to moderate, even if accompanied by politicized calls for more interest rate declines.

Overseas, most industrial countries have probably ended their rate easing, except possibly the ECB, but with credit easing operations generally continuing unabated.

Outsized cuts

Some emerging countries continue to surprise with outsized interest rate cuts recently (Brazil, Turkey).

South Africa may well again join this parade this week, prime being cut by 0.5 percent to 10.5 percent (potentially keeping a last 0.5 percent cut in store for August, according to financial market reasoning and backed up by simple Taylor Rule estimates).

Leading indicators, purchasing manager surveys and equity prices firmly hint at 3Q2009 economic recovery looming in the US. Meanwhile industrial output and exports are stirring once again worldwide, with especially the likes of Taiwan, Korea and Japan in the lead, presumably the main beneficiaries of any Chinese growth acceleration and Western inventory destocking ending.

The World Bank last week revised China’s expected GDP growth for 2009 from 6.5 percent to 7.3 percent (reality could be even higher), and Goldman Sachs sees 10.9 percent GDP growth next year (which is presumably shorthand for 11 percent).

No wonder commodity prices have been trending higher.

These stirrings should also in coming months connect with our mining and industrial exports, inducing output increases. Despite employment declines and lingering motor trade, building industry and retail weakness, we will probably also see our GDP lift from the middle of 2H2009 as especially our inventory rebound domestically fully connects (its early stirrings already evident in 1Q2009).

Both commodity price surges (oil back to $70 and not fully neutralized by a Rand firming towards 8:$) and GDP starting its next cyclical expansion should at some point end SARB willingness to keep easing interest rates.

Very early days

It remains very early days, however, to expect a return to consumer boom conditions, as especially banks remain very tightfisted with credit, and consumers generally show limited appetite for big ticket purchases, preferring to use up their existing stock of durables.

Whether the SARB by this time next year will have tightened interest rates by one percent, as discounted by our financial markets, remains a more dubious proposition.

Although such reasoning is in line with global fears and caution centered on central bank actions and the need to eventually cut back on generous liquidity provisioning, especially the Fed gives so far little indication of wanting to start raising rates any time soon.

Instead, impaired credit conditions keep requiring Fed accommodation, while the enormous resource slack building up (even President Obama now foreseeing 10 percent unemployment next year) is providing every reason to believe the current deflation (falling prices) will be followed by nearly stagnant price levels for a long time still. US inflation revival is many years in the future, though financial markets will probably require time to develop deeper confidence on this score.

In our case, given likely commodity price developments, especially oil, any onset of renewed SARB rate tightening will probably be reserved for 2011-2012.

Zuma's timing

Thus we are set for a period of low inflation, firmer rand, low interest rates and gradual economic recovery. Presiding over it all, as he will over the soccer next year and the infrastructure completions steadily coming on stream, will be President Zuma.

His timing as always is impeccable. Bill Clinton couldn’t have done it better.

Cees Bruggemans is chief economist of First National Bank.


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