National Monetary Policy Forum Chris Loewald, Head: Policy Development and Research 1 April 1 Pretoria
In the April 17 MPR Executive summary & overview of the policy stance Overview of the world economy Financial market developments (new chapter) Overview of the domestic economy Overview of inflation developments and the forecast Boxes: Reweighting and rebalancing of CPI Forecast accuracy compared with other forecasters Asymmetric Phillips Curve Next MPR release: 3 October 17//11
Overview International economy High policy uncertainty, but very low volatility World growth above trend, and inflation generally returning to targets Domestic economy Growth has probably bottomed, but the forecast recovery is not robust Macroeconomic imbalances have moderated Prices Short term inflation volatile (oil, food) Medium-term inflation forecast has been stable and benign but underlying inflation and inflation expectations remain elevated Policy Repo stable at 7.% since March 1 17//11 3
Global policy uncertainty is high but volatility is simultaneously unusually low US VIX index of implied volatility and policy uncertainty 5 July 11 US debt ceiling debate Brexit vote US elections 3 5 35 3 Index 5 Taper tantrum 15 Index 15 1 1 1 11 1 13 1 15 1 17 5 VIX volatility index Global economic policy uncertainty Sources: Baker, Bloom, and Davis (1), and Bloomberg 17//11
Although the world risk-free interest rate is rising Yield to maturity, per cent 3,5 3,,5, 1,5 1, Treasury nominal coupon yield curves October 1 December 1 March 17 Per cent,, 1,8 1, 1, 1, 1,,8 Federal funds rate Effective federal funds rate 1 Nov 1 17 Nov 1 3 Apr 17,5,,, 1 3 5 1 3 Years to maturity Source: Bloomberg, 1 17 18 19 Sources: CME group, Federal Reserve and South African Reserve Bank 17//11 5
Riskier assets are doing well (with some exceptions) EMBI+ and US corporate 1y spreads 13 Emerging market currencies 18 1 Indices: May 13 = 1 1 1 1 1 Indice: 1 Jan 1 = 1 11 1 9 8 8 US corporate 1-year spread EMBI+ sovereign spread 13 1 15 1 17 Source: Bloomberg 7 Jan 1 Mar 1 May 1 Jul 1 Sep 1 Nov 1 Jan 17 Mar 17 JPM EM Currency Index South African rand Turkish lira Brazilian real Russian ruble Mexican peso Sources: Bloomberg and South African Reserve Bank 17//11
This is probably explained by better fundamentals, with global growth improving and output gaps narrowing Manufacturing purchasing managers' indices World real trade-weighted GDP growth 55 5 Index 5 5 y/y, per cent 3 1-1 G3 (GDP PPP weighted) 35 BRICS (GDP PPP weighted) JPMorgan global manufacturing PMI 3 8 9 1 11 1 13 1 15 1 17 - -3 8 1 1 1 1 18 World real GDP World output gap Source: International Monetary Fund, JPMorgan and own calculations Source: International Monetary Fund and South African Reserve Bank 17//11 7
Inflation is moving back towards targets from below in advanced economies 8 Producer price inflation Headline consumer price inflation 3 y/y, per cent - y/y, per cent 1 - - 1 11 1 13 1 15 1 17 US Japan Euro area United Kingdom Source: Haver Analytics -1-1 13 1 15 1 17 US* Japan Euro area UK Inflation Target *Personal Consumption Expenditure deflator Source: Bloomberg 17//11 8
and from above for many emerging markets Actual and forecasted inflation and Central Bank rates Inflation spreads 18 1 1 1 Inflation target range Inflation 1 1 1 EM - AE SA - AE y/y, per cent 1 8 y/y, per cent 8 15 1 17 15 1 17 15 1 17 15 1 17 15 1 17 15 1 17 South Africa Brazil Russia Chile Colombia India - 1998 8 1 1 1 1 Source: Bloomberg and various central banks Source: JP Morgan, Statistics South Africa and South African Reserve Bank 17//11 9
Potential for upset? China s stimulus benefits short term growth but exacerbates imbalances 1 Chinese economy and commodity prices 5 3 Credit growth and gaps 1 53 1 Japan Spain 19 Indices: Jan 1 = 1 8 5 51 5 Index points Per cent of GDP 17 15 13 11 Thailand China Iron-ore (left-hand scale) Coal (left-hand scale) Chinese purchasing managers index 1 13 1 15 1 Sources: Bloomberg and South African Reserve Bank 9 8 9 7 5 198 1983 198 1989 199 1995 1998 1 7 1 13 1 Sources: Bank for International Settlements and International Monetary Fund 17//11 1
In the United States, the new administration may do less for growth than markets now expect Index (January 1 = 1) 13 US Equities 15 1 115 11 15 1 95 9 85 8 Mar-1 Jun-1 Sep-1 Dec-1 Feb-17 S&P 5 Index S&P/ASX Financials Sector Index Source: Bloomberg Percentage point change,5,,3,,1, -,1 -, -,3 -, -,5 Change in economic forecasts between Sept. and Mar. 1 17 18 17 18 17 18 GDP Unemployment PCE Inflation Fed Bloomberg Consensus Economics* *No unemployment forecast is available. Source: US Federal Reserve, Bloomberg, Consensus Economics, and South African Reserve Bank 17//11 11
European crisis is also far from resolved Brexit, French polls, Italian banks and Greek debt Per cent of gross loans Non-performing loans 18% 18 Italy 1 Spain Portugal 1 Germany 1 Eurozone 1 8 8 1 1 1 1 Source: Bloomberg Per cent French-German 1y bond spreads, 1,8 1, 1, 1, 1,,8,,,, 1 11 1 13 1 15 1 17 Source: Bloomberg and South African Reserve Bank 17//11 1
Growth in South Africa had been expected to pick up from just.3% in 1 3,5 Real GDP growth 3,,5 y/y, per cent, 1,5 1,7, 1, 1,,5, 1 11 1 13 1 15 1 17 18 19,3 Source: Statistics South Africa and South African Reserve Bank 17//11 13
8 7 5 3 Recovery lags accelerations in other economies, and SA remains a global under-performer y/y, per cent 1 8 - Real GDP growth Commodity countries South Africa World Forecast 5 7 9 11 13 15 17 Per cent 1 9 8 7 5 3 1 53 SA s percentage ranking and share of countries growing faster/slower than SA 5 7 9 11 13 15 17 Share of countries growing faster than South Africa Share of countries growing slower than South Africa South Africa (percentage rank) (left-hand scale) 15 Sources: International Monetary Fund, Statistics South Africa and South African Reserve Bank Sources: International Monetary Fund, Statistics South Africa and South African Reserve Bank 17//11 1
Better growth in 17 partly reflects a primary sector recovery 3 Production side of GDP, Contributions to GDP growth y/y, per cent 5 GDP Agriculture Mining 15 1 5-5 -1-15 1 15 1 17 Source: Statistics South Africa and South African Reserve Bank Percentage points 1,5 1,,5, -,5-1,, 1, -,1,3 Mining Agriculture Other GDP Growth 1,,8 -, -, -,,,3,7 1 15 1 17 Source: Statistics South Africa and South African Reserve Bank 17//11 15
Over 18 and 19, growth benefits from stronger investment and household consumption Contributions to GDP 3,3 5 Per cent 3 1,,5 1,7 1,3,3 1, 1,7, -1 - -3 11 1 13 1 15 1 17 18 19 Consumption Investment Other Net exports Government consumption GDP Sources: Statistics South Africa and South African Reserve Bank 17//11 1
3,5 1,5 1,5 Household consumption up on income and lower inflation, but confidence needs to recover Real Final Household Consumption Consumer expenditure 5 15 y/y, per cent 3 Percentage points - 1 5-5 -1-15 y/y, per cent 1-8 9 1 11 1 13 1 15 1 17 18 19 - Durable goods Semi-durable goods 1 11 1 13 1 15 1 17 18 19 Non-durable goods Total household consumption Services Consumer confidence (rhs) Sources: Statistics South Africa and South African Reserve Bank Sources: Statistics South Africa and South African Reserve Bank 17//11 17
Investment slumped to a post-crisis low in 1, but expected to improve 3 Growth in investment and GDP 1,, y/y, per cent 1-1 - -3, Investment GDP - -5-3,9 1 17f 18f 19f Source: Statistics South Africa and South African Reserve Bank 17//11 18
An investment recovery relies on private sector confidence and the public sector implementing spending plans Index Business confidence and real fixed investments 9 8 7 5 3 1 RMB/BER BCI (left-hand scale) Real fixed investment by private business 1 7 1 13 1 5 15 1 5-5 -1-15 - -5-3 Percentage change over four quarters Nominal, R billion 135 13 15 1 115 11 15 1 95 9 Budget 15 Budget 17 SOE infrastructure spending Sources: South African Reserve Bank and Rand Merchant Bank/Bureau for Economic Research Sources: National Treasury 17//11 19
Net exports contributing to growth, but modest, as imports expected to rise Growth in components of net exports 17 Exports and Imports 1 15 y/y, per cent - Exports - Imports - 15 1 17 18 19 Source: Statistics South Africa and South African Reserve Bank Index: 1 = 1 1 13 1 11 1 Exports 9 Imports 8 5 7 8 9 1 11 1 13 1 15 1 Source: Statistics South Africa and South African Reserve Bank 17//11
SA s terms of trade hit a post-11 high in the first quarter of 17, mostly due to higher prices for industrial commodities Index: 1 = 1 11 15 1 95 Terms of trade Industrial commodities 18 1 1 1 1 8 Coal Iron-ore 5 7 9 11 13 15 17 19 Source: Bloomberg and South African Reserve Bank Precious metals 9 November 1 MPC 1 8 March 17 MPC 1 1 85 1 8 1 1 1 1 18 1 8 Source: South African Reserve Bank Platinum Gold 5 7 9 11 13 15 17 19 17//11 Source: Bloomberg and South African Reserve Bank 1 US$/ton US$/ounce
and declining oil prices 11 Terms of trade 1 Brent crude oil 15 1 1 Index: 1 = 1 1 95 US$/barrel 8 9 November 1 MPC March 17 MPC 85 8 1 1 1 1 18 Source: South African Reserve Bank 1 11 1 13 1 15 1 17 Sources: Bloomberg 17//11
19 18 17 1 15 1 13 1 11 1 The forecast anticipates moderating terms of trade, stronger imports, widening the current account deficit somewhat The current account Current account balance -1 Percent of GDP - - - -8 8 9 1 11 1 13 1 15 1 Dividends Interest Other income Services Transfers Trade Current account Source: South African Reserve Bank Percent of GDP - -3 - -5 - -7-8 5 7 9 11 13 15 17 19 Source: South African Reserve Bank 17//11 3
Inflation back within the 3-% range around mid-17, following a period of target breaches 1 Targeted inflation Percentage change over 1 months 9 8 7 5 3 1 3- per cent inflation target range 9 11 13 15 17 19 Source: Statistics South Africa and South African Reserve Bank 1 15 1 17 18 19 Annual.1..3 5.9 5. 5.5 inflation (%) 17//11
The near-term forecast has fluctuated much more than the medium term 8 7 Evolution of inflation forecasts Policy relevant horizon y/y, per cent 5,5 5,8 5,9 5, 5, 5, 5,5 5,5 3 1Q1 Q Q3 Q 17Q1 Q Q3 Q 18Q1 Q Q3 Q Jan. 1 March 1 May 1 July 1 Sep. 1 Nov. 1 Jan. 17 March 17 Source: Statistics South Africa and South African Reserve Bank 17//11 5
reflecting petrol price developments Evolution of Brent crude oil price forecasts 75 7 5 US$/barrel 55 5 5 35 3 Actual May 15 Mar 1 Sep 1 Mar 17 15 1 17 18 19 Sources: Bloomberg and South African Reserve Bank 17//11
as well as food price fluctuations 1 Food forecast revisions 18 Food price inflation 1 1 1 1 1 1 Per cent 8 Per cent 8 Actual Previous MPR Current MPR Inflation target range 1 17 18 Source: South African Reserve Bank Food and NAB Bread & cereals Meat Vegetables 3-1 1 17 18 Inflation target range Sources: Statistics South Africa and South African Reserve Bank 17//11 7
Despite medium term forecast stability, a key question is why inflation remains relatively high despite fading shocks (food, fuel, exchange rate) and persistently weak demand 9 Components of core inflation 1 Selected core components and input costs 8 1 7 8 y/y, per cent 5 y/y, per cent 3 Services 1 Core goods Core inflation 9 11 13 15 17 Sources: Statistics South Africa and South African Reserve Bank - Core inflation Insurance Education Vehicles - Fuel Electricity - Inflation target range 3q1 q1 1q17 q17 3q17 q17 1q18 q18 3q18 q18 Sources: Statistics South Africa and South African Reserve Bank 17//11 8
Wage and salary pressure is an important part of the puzzle 11 Unit labour cost 7 Contributions to headline inflation 1 5 9 y/y, per cent 8 7,7 7,, 5,8 5 3 3 9 1 15 18 Source: South African Reserve Bank Per cent 3 1-1 - 11 1 13 1 15 1 17 18 19 Import price contribution Unit labour cost contribution Output gap contribution Headline CPI Combined contribution Sources: Statistics South Africa and South African Reserve Bank 17//11 9
which is related to uncomfortably high inflation expectations,5 Survey-based inflation expectations* 8, Break-even inflation rates, 7,5 Per cent 5,5 5,,5, 3,5 3, Current year One year ahead Two years ahead Five years ahead Inflation target range 11 1 13 1 15 1 17 * Total, combining expectations of labour, business and analysts Per cent 7,,5, 5,5 Five year 5, Ten year,5 1 15 1 17 Source: Bureau for Economic Research Source: Bloomberg 17//11 3
The inflation forecast also faces risks, of which the biggest is the exchange rate 9 Evolution of REER assumptions 18 Bilateral exchange rate 85 1 Index: 1 = 1 8 75 Rand/US$ 1 1 1 7 15 1 17 18 19 Jul 1 Sep 1 Nov 1 Jan 17 Mar 17 Actual 8 11 1 13 1 15 1 17 Source: South African Reserve Bank Source: Bloomberg 17//11 31
The repo rate has now been stable at 7% for a year Per cent Key policy rates are still relatively low 18 1 1 1 1 8 Repurchase rate Prime rate 8 1 1 1 1 Source: South African Reserve Bank Cumulative change (percentage points) 8 7 5 3 1 The hiking cycle has been gentle September 199 May 1998 January June January 1 1 3 5 7 9 11 13 15 17 19 1 3 5 7 9 31 33 35 Months since first repo rate increase Source: South African Reserve Bank 17//11 3
19 18 17 1 15 1 13 1 11 1 The forecast showed an easing in the inflation and growth trajectories Growth and inflation 8 7 Per cent 5 3 1-1 1 11 1 13 1 15 1 17 18 Headline inflation Core inflation GDP growth Source: Statistics South Africa and South African Reserve Bank 17//11 33
while downgrades jeopardise the expected improvement in the inflation and growth trend Bond yield, per cent 1, 9,5 9, 8,5 8, 7,5 South African Yield Curves -Mar -Apr Impact on yield curve largely depends on how markets have priced in the downgrades Estimates range from 8 to 1 basis points shift in the short-end of the yield curve* Higher costs per increment of debt-financed real output Inflation outcomes net effect of fx depreciation, larger output gap 7, 3 5 7 1 15 5 3 Years to maturity Source: Bloomberg *See Y Algu, M Hanusch, S Hassan, L Soobyah, and A Kranz (1), What happens to public borrowing costs when a 17//11 3 government loses its investment grade credit rating?, South African Reserve Bank Working Paper Brief
Relatively accommodative policy settings use up existing slack in the economy but cannot push up potential Output gap Population and GDP growth 5 Percent of potential GDP - -1, -,1 Percentage change 3 1 - - 8 9 1 11 1 13 1 15 1 17 18 19 Source: South African Reserve Bank -1-3 5 7 9 11 13 15 17 19 Real GDP growth Potential GDP growth Sources: Statistics South Africa and South African Reserve Bank 17//11 35
Conclusion World economic conditions have improved; this could be a blip or a trend SA growth looks better, mainly because recent outcomes were so disappointing However, macroeconomic imbalances have improved, supporting the rand Inflation expected to return to within the target range following an extended breach While inflation and inflation expectations remain high over the medium term Downgrade may delay improvement 17//11 3