Revised GDP & rate outlook

Two further 50 bps rate hikes are expected, & we anticipate GDP growth of 2.1%y/y in 2014

This week’s data releases will provide insight into the health of the supply and demand sides of the economy in December. We anticipate a slowdown in retail sales to 2.3%y/y from 4.2%y/y last month and a seasonal recovery in manufacturing from 0.3%y/y to 1.4%y/y. Mining should benefit from base effects and the unemployment data will give us further clarity about the rate of change in the labour force and discouraged workers.

Post the MPC’s decision to raise the repo rate by 100 bps, and considering their new inflation forecasts, which anticipate CPI will peak at 6.6% in Q4 2014, we have revised our interest rate outlook.

Our base case is that the SARB will raise the repo rate by 50 bps at each of the next two meetings (March and May), ending the year at 6.5%. We expect that these will be unwound in the September and November 2015 meetings and the repo rate will end 2015 at 5.5%. Our bearish scenario is for further hikes of 300 bps; i.e. 50 bps at each meeting until January 2015. Thereafter, we expect the rate-cutting cycle to commence in July 2015 and end in July 2016, reducing the repo rate by 350 bps, returning to 5%.

Unisa’s Bureau of Market Research (BMR) conducted a study in 2012 in anticipation of a turn in the interest rate cycle (BMR Research Report 421, Impact of interest rate changes on South African households). We thought it would be a good time to revisit the study and its conclusions.

Using of a macroeconomic model and a SAM, a 100 basis point increase in the repo rate reduces nominal GDP by -0.54%, with a 3 quarter lag. The real GDP impact is -0.22%;, i.e. the inflationary impact is -0.32% (CPI decreases by 0.38%). Within real GDP, PCE declines by -0.24%, exports by -0.02% and imports by -0.11%; i.e. it is current account positive.

The study provides a breakdown of the impact of a 100 bps repo rate increase on households specifically, and estimates that the biggest percentage impact is on the higher income households Expenditure in households in the highest decile decreases by 0.6% compared to a 0.23% decrease for the poorest households. Employment can decrease by more than 26,000 per 100 bps increase. Similarly, highly skilled individuals also have the highest percentage drop in employment at -0.28%, compared to -0.22% on average.

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