While a year of hard work for property and consumer-related sectors appears likely, given economic and household sector income growth mediocrity, there is little to suggest any more than a mild interest rate hike in the coming 12 months, First National Bank household and property sector strategist John Loos asserts.
He added in a note this week that, while global commodity prices remained depressed and stunted domestic export growth, it boded well for the consumer price index (CPI) inflation rate, given that the oil price remained under severe pressure.
At a macroeconomic level, therefore, the likelihood of any major CPI inflation shock at this stage appeared remote this year.
“However, there are some upward pressures on CPI inflation, which could be expected to drive it gradually higher. These include a drought-driven food price inflation rise, as well as a rand that remains under pressure, driving import prices higher,” he held.
While higher CPI inflation would narrow disposable income, Loos expected the uptick to be modest, allowing the South African Reserve Bank to continue to raise interest rates at the modest rates seen in 2014 and 2015.
“The big deal on the macroeconomic policy stage this year is likely to be the National Budget Speech, as ratings agencies and investors look for clues as to if and how the Finance Minister will arrest the steadily rising trend in the
government debt-to-gross domestic product (GDP) ratio – a key source of concern in recent years,” he commented.
For the consumer, Loos expected government’s move to narrow its fiscal deficit and slow the rise in its debt burden to drive a further rise in the effective personal tax rate.
He further expected the household sector’s tax burden relative to disposable income to rise in 2016, while housing taxes, municipal rates and utilities tariffs were also expected to continue their above-CPI inflation pace of increase.
Economic growth was, meanwhile, likely to remain under pressure, continuing on its broad multiyear slowing trend that started in 2012.
“The downward pressure on growth comes from South Africa’s well-documented
structural constraints, including its highly unequal skills distribution and rigid labour market, but also from weak global commodity prices and gradually rising interest rates,” said Loos.
The lagged impact of a multiyear growth slowdown could well be a decline in formal sector employment in the private sector and the result is likely to be another year of poor consumer confidence.
This, in turn, could lead to a key trend change towards a financially more conservative household sector, he cautioned.
However, a more conservative household sector would likely constrain the performance of the residential property market, resulting in a slowing in the average house price growth rate from 6% in 2015 to below 5% this year.