Jeremy Maggs (JM): So, high expectations ahead of the Reserve Bank’s rates announcement on Thursday, and tonight, Frederick Mitchell, economist at Aluma Capital on the financial state of South Africans, from consumer confidence and interest rates, inflation rates to retail sales, and that much-anticipated decision by the SARB. All eyes are on these important set of figures to gauge the health of our economy, and I’m hoping that Frederick will help us understand the broader implications of this data and what we can expect in the days, weeks, and months ahead.
And this Thought Leadership interview is brought to you by Aluma Capital. Are you ready to build generational wealth and secure your financial future? Then visit aluma.co.za.
Frederick, good evening to you, and welcome. Let’s start with consumer confidence. How are you rating it right now?
Frederick Micthell (FM): Well, I guess the mood is quite positive in the country. We saw last week business confidence that came out, and that was also some positive. So, we’re still in a negative territory, but we’re the highest number now being recorded since, I think, the second quarter in 2019.
So, overall, it’s a good number. It’s five points up from the previous quarter. So, the third quarter is at minus five, and the previous quarter and the second quarter was like at minus 10.
So, there’s a general positive mood in the economy, and let’s hope we can sustain that going forward.
JM: And that’s driven to an extent, I imagine, by a moderation in inflation from January to July. That’s had an impact on economic behaviour and the way in which we spend our money.
FM: Yes, I would assume so. If you look at the inflation rate at the beginning of the year, it was 5.3%, moderated to 4.6%. And I guess, if I’m not mistaken, the latest expectation is 4.5%, 4.4%. So, it’s a good thing. Prices are slowing down in terms of the increases that we see.
And I guess consumers can feel a bit relieved with the increases of prices, just moderating or slowing down a bit. So, I guess that’s some really good news for us.
JM: But we’re not out of the woods yet. The risks still remain, don’t they?
FM: Yes, we know there’s some risks associated with inflation. Last week and the week before, there were some noises in the media about ESCOM applying for another 30% plus on electricity tariffs, and we know what that’s going to have on the inflation rate. And so, we’re not out of the woods yet, but good news so far. Let’s hope NERSO can contain some of increases for the next couple of financial years.
JM: Frederik, the relationship between lower inflation rates and the impact on household spending and saving patterns, how dramatic is that?
FM: It’s quite dramatic in the sense that if we look at the Reserve Bank’s stance on inflation, which is quite hawkish, if they hike the rates, it leaves less disposable income available to households in general with, let’s say, debt and the debt servicing cost of credit items. And that has a direct impact on how the economy performs, what’s happening in demand, how we can save, what disposable income is left after we’ve paid our debts.
So, that’s quite a huge thing to have a look on. It’s inflation rate and the Reserve Bank’s hawkish approach towards inflation rates in general.
JM: So, come Thursday, I would imagine that a cut has already been priced in by the market, but it’s perhaps more interesting to see what’s going to happen either in October or November. And once we get that kind of downward trajectory, I would imagine that lights a bit of a firecracker under the economy.
FM: Let’s hope so. If we look at the economic growth that came out the week before, it was better than expectations.
So, that’s some good news. And we know the demand is quite fragile and on the weak side, even though a bit positive, it’s coming down to the positive side now, as consumer confidence are starting to lift its head a bit. But we still need to look at what’s going to happen in the medium term, how that’s going to affect whether if inflation does come back and how the Reserve Bank will respond to that.
Let’s hope we can get inflation rates fairly stable at the rate that the Reserve Bank like, which is around the 4.5% roundabout, and we can get that for an extended period of time. And we can see a lowering of interest rates that might just, say, kick demand a bit up and create some bit unexpected economic growth going forward.
JM: What might cause inflation, on the other hand, to rise, though?
FM: We are an importer of fuel or say mineral products, as it’s known.
And the international fuel prices does have a great impact on that as well as the ability of the economy not to have load shedding. If we have load shedding, we know there’s a cost associated with alternative generation capacity of businesses and that costs are only transferred onto the consumer. And that will influence inflation rate in the short to medium term, which then again might influence the Reserve Bank’s decision, say, not to lower rates as fast or aggressively as initially assumed at this stage.
JM: Frederick Mitchell, I’m going to leave it there. Economist at Aluma Capital, I do appreciate your time tonight and that thought leadership interview brought to you by Aluma Capital, offering innovative solutions designed to help you achieve lasting success. Visit aluma.co.za, Aluma Capital, your partner in creating a lasting legacy.
