Anyone who thinks we may soon see lower interest rates did not attend the latest Reserve Bank Monetary Policy Forum meeting. From answers they gave to questions, it is very clear that the Reserve Bank will not hesitate to increase interest rates further if they deem it necessary. Reserve Bank president Tito Mboweni also made it clear the Reserve Bank is autonomous and not subject to political interference, and that it would do whatever it must to get inflation back into the target range. Clearly pleas about the hardship caused by high interest rates will fall on very unsympathetic ears, even if they come from government. Global economic growth slowed down at the end of 2007.
The US subprime crisis led to slower growth in the US and the EU. Growth accelerated in developing Asian countries, while economic growth remained high in African countries. global economy grew by 4,9% in 2007 – advanced economies averaged 2,7% while the emerging market and developing countries grew by 7,9%. The Chinese economy grew by 11,4%, its third year of above 10% growth, India by 9,2% and African countries on average by 6,3%. Lower economic growth is expected during 2008 and 2009. The International Monetary Fund (IMF) predicts global growth of 3,7% for 2008 and 3,8% for 2009. Advanced economies will grow by 1,3% in 2008 and 2009.
Emerging economies will still grow at 6,7% and 6,6%. The IMF regards the downside risk to growth as larger than the possibility of increased growth. T he sharp increase in oil prices was a major driver of higher inflation and lower growth. Brent oil sold at US/barrel in January 2008.
Since February 2008 the Brent oil price increased steadily to US6/barrel in April. At the time of going to print it had reached US4/barrel. O il demand continues to grow as demand in China, India and Russia increases. Major oil exporters like Saudi Arabia also use more oil to fill the gap left by lower gas supplies. With little spare capacity, robust demand growth and a nearing European winter, there’s little chance of lower oil prices.
Brent futures for the rest of 2008 show a price range of between US5/barrel and US0/barrel. I nflation increased in most developed and developing countries. The US has cut interest rates by 3,25% since January 2007, while European countries marked time.
Developing countries generally increased interest rates. A weaker rand resulted in higher prices for imported products. rand weakened against a weaker dollar to R7,59/US$ by mid-May 2008. On a trade-weighted base, the rand devalued by more than 17% since November 2007.
Risk aversion against emerging market currencies contributed largely to the weakening of the rand, and will probably continue to do so in future. W age inflation remained relatively low in 2007. This may change as trade unions protest against high food and fuel prices and manage to push for lower interest rates. Food price inflation is a problem in many countries due to increased demand and lower production.
While some grain prices may weaken slightly in 2008, food inflation will remain high for the next couple of years. Looking ahead nternationally, food prices will remain high as demand continues to grow and as more countries introduce measures to limit exports. Locally, food prices will remain high and the current and future increases in fuel and fertiliser prices will result in lower production in 2009. While world prices for grains may drop slightly, a weakening rand will ensure import and export parity remain high. S lower economic growth in SA will put less pressure on manufacturing and logistic capacity. However, the supply situation will remain tight.
The consumer’s disposable income will still increase and, while stores catering for the top end of the market will experience lower sales, this won’t apply at the middle and lower end of the market, where demand remains strong. he Reserve Bank’s own model predicts a decreasing trend in CPIX inflation from a peak in the first quarter of 2008 to 6% by the end of 2009.
Inflation will probably remain close to 8% for the rest of 2008 and reach 6% by end 2009. he Reserve Bank model assumes no change in bank policy during the two years. If CPIX remains above 6%, the Reserve Bank will increase interest rates to limit demand and credit uptake. H igher food prices, increasing fuel prices and expensive imports will keep inflation above the target range of 6% to 3% for the remainder of 2008. Chances are good that we’ll see a further half percentage point increase at the next meeting of the Monetary Policy Committee.
This will make the Reserve Bank very unpopular, especially with the post-Polokwane group. Lower consumer demand, especially for durable and semi-durable goods, will help moderate prices. o-called base effects, when one compares prices with high-priced periods in the previous year, may also help to lower inflation.
Higher interest rates, sharp increases in fuel and fertiliser prices and the possibility of a slow-down in the increase in producer prices will play havoc with farmers’ cash flow, especially for highly leveraged farmers. For the majority of farmers it is not the time to expand but to consolidate as much as possible. Better times will come and those who are careful now will still be around to enjoy them. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy. |fw