Impact of sharp fall in oil prices on SA economy
The steep decline in international crude oil prices to well below $80 per barrel superficially generates a perception that further declines in fuel prices will result in a boost to consumption activity and overall economic growth. As it is, other things equal, a potential -60 cl further decline in the petrol price at the beginning of December stands to knock a further -0.3% to -0.4% off the CPI inflation rate over the next two months from its current level of 5.9%, adding an equivalent amount to disposable income.
- This means that purely on account of the decline in inflation, the real repo rate ought to turn positive without any increase in the actual rate itself. It is for this reason that it is unlikely that interest rates will be increased at the MPC meeting next week.
- However, one needs to recognise that part of the reason for the sharp falloff in oil prices is the very deterioration in expectations of growth for the global economy which have brought about an associated decline in gold, platinum and other metal prices. What benefit South Africa might derive from lower oil prices appears to have been more than counterbalanced by lower prices of commodities it exports.
- It is therefore premature to wax lyrical about the manner in which the South African economy's growth rate might improve as a result of recent global developments. This is especially the case if one peruses the latest IFO assessment of the global economic climate which has seen an especially steep decline in sentiment regarding European economic prospects.
- On the face of it, South Africa's economic growth should improve to around 2.5% next year, in large measure because 2014 would have been such a poor year for economic growth. However, there appear to be two big risks. Firstly, the global economy could turn out to be much weaker than currently anticipated, with an associated further decline in commodity prices. Secondly, there is a risk of a further escalation of industrial relations turmoil as government attempts to impose fiscal discipline in support of its deficit reduction programme. In addition, there is a risk of competitive attempts by different unions to press for ever more aggressive wage increases in the midst of a fragmentation of trade union unity in South Africa.
Source : Econometrix, 14 /10/ 2014