JOHANNESBURG: Annual headline producer inflation moderated marginally for the second consecutive month to 7 percent in April from 7.1 percent in the prior month and probably contributed to the decision of the Reserve Bank to keep interest rates on hold at its May meeting. Market expectation was for a rise to 7.3 percent year on year. Headline inflation pulled back to 6.2 percent in April from 7 percent in February.
Nedbank said despite the marginal slowdown in April, factory gate prices were forecast to increase substantially in the months ahead with most of the pressure expected to come from food products, which make up 25.2 percent of the producer price index (PPI) basket. “Given that both factory gate prices and consumer prices will remain elevated for most of the year because of the drought and a weak currency, the Reserve Bank will have an increasingly difficult task of balancing rising prices and weak growth,” Nedbank said.
In March, Reserve Bank governor Lesetja Kganyago warned that the effects of the drought would take their toll. He said food prices accelerated faster than previously expected, resulting in an upward revision to the food price forecast. Yesterday Euler Hermes, a global leader in trade credit insurance, said the business environment in South Africa also clouded the situation with ongoing structural rigidities and current economic and political uncertainties.
Ludovic Subran, the chief economist at Euler Hermes, said these rigidities included uneasy labour relations and periodic disruptions to power supply. These were compounded by at least four other factors: weak international commodity prices, with commodities accounting for 14 percent of total gross domestic product (GDP); a slowdown in China, South Africa’s largest trade partner; drought conditions, with weakened agricultural output and imports of foodstuffs; and uncertainties relating to US monetary policy tightening. “Rates of expansion of around 5 percent are required to make meaningful improvements in incomes and living standards. However, structural impediments have generally limited GDP growth to below this rate,” Subran said.
He said business failures were more likely against this background and warned that insolvencies could increase by 10 percent this year – the first outright deterioration since 2009. He said management teams would need to keep a cool head in the coming months, after the adrenalin rush caused by volatile financial markets. Subran added: “The construction sector is already registering an increase in insolvencies. Moreover, a significant lengthening in days sales outstanding, the average number of days that receivables remain outstanding before they are collected, is already apparent in several sectors, such as retail, food and technology.”
