Were it not for Eskom’s problems, the economy would now be cheering the impact of lower fuel prices.
The abrupt decline in the oil price shown in the chart below is potentially very good news for the SA economy.
These welcome trends have relieved the budgets of the average household and will encourage more spending. It has been the unwillingness and inability of households, who account for over 60% of all spending in SA, to spend more that has been such a drag on economic growth. In the quarter to September 2014, household spending grew at a below par real 1.3% annual rate, though this was an improvement on the 0.5% and 1.1% rates recorded in the two previous quarters of 2014. A lower petrol and diesel price will also reduce the cost of delivering these extra goods and services to households.
All of this should help add further downward pressure on the rate of inflation that over the past three months has fallen so sharply. We show the three month change in the CPI and Producer Price Index (PPI) below. Inflation over the past few months has declined sharply, making the prospect of higher short term interest rates much more unlikely and less threatening to spending by households.
It is also worth noting that the prices of many of the goods we export have held up better than the oil we import: about 20% of all imports. The ratio of the price of platinum and gold to the price of oil is shown below. In a relative sense the platinum we export now earns about 50% more than the oil we mostly import than it did only a few months ago. This is very helpful to the economy and its balance of trade. Over the longer term, as we also show back to 2010, these so called terms of foreign trade effects have not been generally favourable – oil was both absolutely and relative expensive until now.
The latest news about the state of the economy at November month end was mildly encouraging. Judged by vehicle sales and demands for cash – the two series we combine to make up our up to date Hard Number Index (HNI) – it seems that the economy has been gaining a little forward momentum. Numbers above 100 for this index indicate growth and higher numbers indicate that the speed is accelerating rather than decelerating. We compare our HNI to the Reserve Bank’s Coinciding Indicator of the Business Cycle that is also well above 100 and seemingly rising, though this series is only updated to August 2014 given its reliance on about 12 economic time series some of which are derived from sample surveys that are inevitably delayed.
The two series that make up the HNI are shown below. Unit vehicle sales appear to be holding up well and if current trends are sustained, will continue at current levels in 2015. To these should be added over 28 000 units exported in November that will be adding meaningfully to overall manufacturing activity.
The demands for notes, when adjusted for lower inflation, also seems to be confirming a cyclical recovery that we noticed last month. The recovery indicated in demands for cash to spend however, while welcome, can best be described as a slow one and hopefully will be a steady one.
If it were not for Eskom turning off the lights – apparently for a want of now much cheaper diesel to fuel peak generating capacity – we would all be feeling much more cheerful, as befits the season. How the impacts of cheaper fuel and less freely available electricity pan out will all be revealed in forthcoming economic activity and the measures of them. We watch and wait with the hope that Eskom can get more of its act together. Better still would be a growing realisation that reliance on one monopoly producer is a very bad idea. The risks of outages would be much lower if electricity generation from coal (and or other sources of fuel) would be better diversified.
The solution is to encourage the private sector to provide the additional capacity and for established capacity in the form of power plants to be sold off for what they can fetch in the market place. Such a willingness to sell off the faltering generating plants to well qualified operators of them would solve, at a stroke, the burden of additional debt that Eskom is imposing on the SA taxpayer debt ratings, revealed higher long term interest rates and a weaker rand. Such privatisation would also ensure much better management of electricity supply over the long run. They say evidence changes belief. The belief in public corporations must surely be highly challenging to the true believers in public ownership.