What to expect from the rand, food and fuel prices for the rest of the year
South Africa’s economy remains under pressure, say economists from finance group Nedbank, and consumers will likely continue to feel the pinch for what remains of the year.
In the group’s latest economic outlook for October, Nedbank said that the economy remains vulnerable, having shrunk in the second quarter – hurt by the floods in KwaZulu-Natal, strikes in some industries, acute power outages, and slower global demand.
The outlook for the second half of the year is also clouded by severe load-shedding, higher domestic inflation, rising interest rates, and faltering world growth prospects, it said.
For consumers, these economic struggles have been felt directly in their pockets, with higher prices due to much higher inflation, rising interest rates, and less disposable income to pay for the rising cost of living.
Nedbank said that inflation is likely to remain elevated in the coming months, ending the year just below 7%.
Given the upside risks to the inflation outlook, the South African Reserve Bank SARB is also expected to tighten monetary policy further during the remainder of this year and throughout next year, it said.
Rand
The rand has been under persistent pressure, hurt by extremely high-risk aversion amid concerns about global growth, falling commodity prices, the return of the current account deficit, speculations about the pace of the interest rate hikes in the US and severe power outages.
However, the SARB’s aggressive policy stance somewhat helped to contain the weakness, the bank said.
In the third quarter, the local unit lost a significant 10.3% against the stronger US dollar – which benefited from its safe-haven status and aggressive hikes by the Fed.
For the year to date, the rand has depreciated by 11.8% against the dollar. However, the rand has appreciated by 2.2% and 7.2% against the euro and the British pound, respectively, for the year to date.
“The rand will probably remain extremely volatile ahead of the ANC’s elective conference in December. It will also be weighed down by concerns about rising US interest rates and tightening financial conditions, load-shedding, falling commodity prices, and worries about slowing global growth, which will influence emerging market risk aversion,” Nedbank said.
However, it said it could end the year on slightly firmer ground than the current level, as SARB continues to hike the interest rates.
According to the bank’s forward projections, it sees the rand ending the third quarter averaging R17.69 against the dollar and closing the year at R17.38.
This would average the exchange for the year to R16.42 to the dollar.
Some good news – but with a catch
While the local economy remains constrained, Nedbank said that some relief is on the horizon for food and fuel prices – but this comes with a catch.
Most notably, consumer inflation appears to have peaked and is expected to continue to fall in the coming months, which should eventually translate into lower prices for consumers, the bank said.
Consumer inflation rose off a low base during the first half of the year. It accelerated from 5.7% in January to a peak of 7.8% in July, driven by surging fuel and food prices worsened by Russia’s war on Ukraine, before edging down to 7.6% in August.
A correction in global oil prices led to reductions in domestic fuel prices, which partially contained the impact of rising food prices and a weaker rand on the overall price level, the bank said.
Inflation – while still elevated – is expected to continue to trend lower in the coming months, driven by cheaper international oil prices.
“Encouragingly, global food inflation has also moderated significantly and should eventually translate into lower domestic prices. Furthermore, shipping costs have also eased, and there are early signs of improving global supply chains.
“As a result, we expected headline inflation to the end of the year to be 6.9% and average 6.8% for 2021, easing further to an average of 5.3% in 2023.”
However, there are upside risks to the outlook emanating from a vulnerable rand, Nedbank said, which is under severe pressure against the robust US dollar, as well as higher domestic wage settlements and higher administered prices – principally electricity tariffs.
A weaker rand will eat into savings made from the lower global oil and petroleum prices and is one of the two major factors impacting local pump prices.
As South Africa is a net importer of goods, a weaker currency does not bode well for product prices.
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