Recent drastic declines in the international oil price and the resultant sharp cuts in the local petrol price could herald a sharp turnaround in South Africa’s more immediate fortunes, says Old Mutual Investment Group.
And this sharp fall, if sustained, will have a number of positive impacts on the SA economy, starting with the consumer and reduced inflation.
Speaking at Old Mutual Investment Group’s first quarterly media briefing for 2015, senior economist Johann Els said that the first obvious beneficiary will be the South African consumer. In 2014 consumers spent R106-billion on fuel.
“The petrol price drop will mean a saving of some R20-billion – or about 1% of total consumer spending.”
The next obvious positive impact will be on inflation, says Els. “We expect headline inflation to fall sharply further from the number of 5,5% at the end of 2014 (and a 2014 peak of 6,6%) to close to 3% by April. We expect average 2015 inflation to be 3,8%, sharply down from the 6,1% in 2014.
“The sharp fall in inflation will result in a significant boost to real consumer income growth and therefore real consumer spending growth (HCE) should lift from an estimated 1,2% in 2014 to 2,9% growth in 2015,” he explains.
According to Els, another positive impact from lower oil prices should be a sharply smaller current account deficit. “Given that oil accounts for 17% of all imports, each 10% drop in the oil price – sustained for a full year – lowers the current account deficit by about 0,6% of GDP. We expect the current account balance ratio to improve from -6% of GDP in 2014 to -3,8% in 2015.”
The substantially lower inflation trajectory, an improved current account and a more stable currency will take pressure off the Reserve Bank in terms of rate increases, Els adds. “We are unlikely to see interest rate hikes during the course of 2015 as it will be difficult for the central bank to justify an increase, especially when inflation is below 4% for a large part of the year.”
Els also believes that the positive Medium Term Expenditure Framework policy statement in October 2014, where the Minister committed to an improved fiscal position by cutting expenditure and raising taxes, will likely be expanded on in the National Budget next month. “An improved economy gives government more options regarding tax income and we expect some tax hikes as alluded to in October.”
The rand could possibly also perform more stably during 2015 – maybe even strengthening somewhat in the short term, Els pointed out. The currency should be supported by slower US policy normalisation, a lower South African current account deficit, better fiscal position and improved inflation and growth prospects.
“While there still are many structural problems inhibiting the South African economy, including potential power cuts that could keep a lid on GDP growth, it seems that 2015 could be a much better year for South Africa,” he says.
Turning to the global environment, Els says that the lower oil price will also boost economic growth in oil consuming nations.
“We have been expecting a positive growth surprise in the global economy even before the oil price collapse. In addition inflation will likely be lower than previously expected and many countries have already cut rates and more are to follow. In the US, policy normalisation is likely to be slower and less aggressive than previously thought as US inflation and wage earnings growth continues at a lower than expected pace.”
