October 2019 Monetary Policy Review
Chris Loewald: Head of Economic Research
1 October 2019
October MPR: Achieving the mandate in a world of risks
2019/10/01

• Global risks – trade tensions and global recession
• Domestic risks – shocks to fiscal position
• Low and volatile domestic growth
• Inflation contained, near the middle of the target range
• The MPC has had some policy space, but risks constraining
Trade tensions collapse trade growth
2019/10/01

Index: Jan 2016 = 100, 6mma
US
Global
China
Source: Haver
Economic policy uncertainty
-4
-2

y/y (%), 3mma
World trade
World trade (exports)
Advanced economy exports
Emerging economy exports
Source: Haver
AE manufacturing suffering, with trade-focused economies slowing
2019/10/01


y/y (%), 6mma
Industrial production
US
Euro area
Japan
Source: Haver

Mar-17
Dec-17
Sep-18
Jun-19
Sep-17
Jun-18
Mar-19
Jun-17
Mar-18
Dec-18
Mar-17
Dec-17
Sep-18
Jun-19
South Korea
Japan
Germany
US
y/y (%)
GDP growth
While services sustain domestic consumption & jobs
2019/10/01

Index: <50= contraction
Global PMI
Manufacturing
Services
Source: Haver
7.5
2.2
3.7

%
G3 unemployment rate
Euro area
Japan
United States
Source: Haver
Output close to potential – probably no aggregate demand shortfall
2019/10/01


Japan
United States
Euro area
% of potential GDP
G3 output gaps
Source: OECD


y/y (%)
G3 GDP growth
(PPP weighted)
Sources: Haver and SARB
Inflation nonetheless persistently below targets, with one major exception
2019/10/01


Jan-17
May-17
Sep-17
Jan-18
May-18
Sep-18
Jan-19
May-19
y/y (%)
G4 targeted inflation
UK
Japan
Euro area
US
Source: Haver
Central banks insuring against growth risks with higher inflation
2019/10/01

Mar 15: QE
launch
Mar 2016:
TLTRO II
Apr 17: ECB
reduces bond
purchases
July 2019: fresh
stimulus
mooted
Sep 19: ECB lowers
deposit rate &
restarts QE


2y gov bond yield, %
German 2yr government bond yields
Sources: Bloomberg and SARB
Dec-15:
Fed liftoff
Dec-16:
2nd rate hike
Dec-18:
Final Fed hike
Mar-19:
Fed indicates
end of QT
Jul-19:
‘Mid-cycle
adjustment’;
end of QT


2y gov bond yield, %
US 2yr government bond yields
Sources: Bloomberg and SARB
Oct-17:
Balance sheet
Normalisation
(QT)
Strange times in financial markets – inverted yield curves, negative yields
2019/10/01

But risk aversion getting in the way of search for yield
2019/10/01

Jan-16
Sep-16
May-17
Jan-18
Sep-18
May-19
US$/fine ounce
Gold price
Source: Bloomberg

Index
Index
Equity performance
MSCI Emerging Markets
MSCI Developed Markets
(right-hand scale)
Source: Bloomberg
EM growth slumps again – no advantage over advanced economies
2019/10/01

-1

Percentage points
Sources: Haver and Citi Research
EM and AE growth differentials
(excl. China)
Strong dollar part of the problem (who wants to win a currency war?)
2019/10/01

Feb-02: 117

Real broad dollar index
2010-14
average:

2016-19
average:

Source: US Fed via Haver Analytics
-10
-5

-300
-200
-100

y/y (%)
Non-residential flows, US$ (billions)
Net capital flows
Broad US$ index (rhs - inverted scale)
Sources: IIF, Bloomberg and SARB
EM Capital flows and the dollar
Depreciation
Debt also part of the story, with big increases in borrowing...
2019/10/01

% of GDP
Emerging markets
Emerging markets (excluding China)
Sources: IMF and SARB
EM total credit to non-financial private sector

% of GDP
Source: IMF
EM general government debt
With not much to show for all the new debt...
2019/10/01

-8
-4

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
%
Investment growth
EM
EM ex-China
Source: World Bank
-2
-1

RUS CHN THA IND PHL ZAF IDN ARG TUR MEX BRA
%
pre-crisis
post-crisis
Sources: The Conference Board and SARB
Total factor productivity growth
SA similar to peers: more debt, less investment, weakening productivity
2019/10/01

% of GDP
Government debt
Source: SARB

-10
-5

y/y (%)
Investment growth
EM
EM excl. China
South Africa
Sources: World Bank and SARB
Higher taxes & higher spending
2019/10/01

% of GDP
National govt. finances
Total expenditure
Total revenue
Source: SARB
But renewed fiscal slippage, with bailouts for Eskom
2019/10/01


% of GDP
Budget balance
Sources: Bloomberg and National Treasury
Bloomberg
consensus
Yield curve steep – despite lower short rates & inflation expectations
2019/10/01

%
Sources: Haver, BER and SARB
* Deflated by two year ahead inflation expectations
South African real 10y government bond yields*

2Y
3Y
15Y
20Y
25Y
30Y
%
Yield curves
September 2018
September 2019
Source: Bloomberg
With persistent external imbalances, largely interest payments to non-residents
2019/10/01

Comparatively large current account deficit – despite a trade surplus
2019/10/01

As interest offsets import compression, CAD unresponsive to weak growth


% of potential GDP
% of GDP
Balance of payments and the business cycle
Current account balance
Output Gap (rhs, inverted)
Source: SARB
Wider Ygap in Q1 surprise, partially reversed with Q2 rebound
2019/10/01


% of potential GDP
Source: SARB
Output gap
Volatility of growth data obscures trend
2019/10/01


8q rolling standard deviation
Standard deviation of GDP growth rates


Q1-15
Q3-15
Q1-16
Q3-16
Q1-17
Q3-17
Q1-18
Q3-18
Q1-19
qoq, saar, %
GDP growth
Near term potential low, adjusted for serial supply shocks
2019/10/01


y/y (%)
GDP growth
Potential growth
Actual growth
Platinum mining
strike & loadshedding
Drought
Load-shedding
Sources: Stats SA & SARB
Demand and confidence factors both important in explaining weak growth
2019/10/01

% of firms listing constraint to current
business activity, 4qma
Constraints in the manufacturing sector
Insufficient demand
Interest rates
Political climate
More constraining
Less constraining
Sources: BER and SARB

Index
Business Confidence
Nominal GDP trend from lower real GDP & terms of trade, less from CPI
2019/10/01


Dec-02
Mar-06
Jun-09
Sep-12
Dec-15
Mar-19
Mar-01
Jun-04
Sep-07
Dec-10
Mar-14
Jun-17
Sep-02
Dec-05
Mar-09
Jun-12
Sep-15
Dec-18
Dec-00
Mar-04
Jun-07
Sep-10
Dec-13
Mar-17
Nominal GDP
Real GDP
GDP deflator
CPI
y/y (%)
Nominal GDP growth:
Pre-crisis boom vs disinflation periods*
1.0
* Boom (business cycle upward phase, 1999Q3 - 2007Q3) vs disinflation period (2017 - date)
Sources: Stats SA and SARB
CPI close to midpoint of target since mid-2017
2019/10/01

y/y (%)
Targeted inflation
Longest period of
inflation within target
Sep-03 - Mar-07:
43 months
New record in one year:
Apr-17 - Oct-20:
43 months
Outcomes temporarily below 4.5%, rising above early next year
2019/10/01


2018Q1 2018Q3 2019Q1 2019Q3 2020Q1 2020Q3
y/y (%)
Headline inflation

2019Q1
2019Q3
2020Q1
2020Q3
Percentage points
Inflation deviation from target midpoint
Food (17%)*
Fuel (5%)
Electricity (4%)
Core inflation** (74%)
Headline inflation (100%)
*Figures in brackets are CPI weights
**Headline inflation excluding food, fuel and electricity
Core inflation subdued, with help from the exchange rate
2019/10/01

Inflation expectations moderating – focus on trend & level
2019/10/01

%
Current year
One year ahead
Two years ahead
Five years ahead
Sources: BER and SARB
Midpoint
3–6% inflation target range
Surveyed inflation expectations*
* Average of labour, business and analyst expectations

%
Market-implied inflation expectations
5y breakeven inflation rate
10y breakeven inflation rate
ULC gap closes as productivity catches up with wage levels
2019/10/01

Y/Y (%)
Average nominal wage growth
Compensation of employees (national accounts) /
employment (QES)
Total salaries and wages (QES) / employment (QES)
Sources: Stats SA and SARB


Percentage points
Contribution to unit labour cost gap
Real wage gap
Productivity
Unit labour cost gap
Source: SARB
Services indexing to lower CPI outcomes, and housing inflation unusually low
2019/10/01

y/y (%)
Services
Services excluding housing
Services: the housing effect
Sources: Stats SA and SARB

y/y (%)
Two-year-ahead inflation expectations (total surveyed)
Services
Sources: BER, Stats SA and SARB
Services inflation and inflation expectations*
Low housing inflation a mix of supply & demand
2019/10/01

% of total sales
Downscaling for financial pressure
Upgrading
Emigrating
Source: FNB
Selected reasons for selling houses


Real 12m moving average (R billions)
Residential buildings completed
Sources: Stats SA and SARB
SA inflation still high relative to peers
2019/10/01


8.1-9 9.1-10 >10.1
Proportion of countries (%)
CPI inflation (y/y%)
Distribution of inflation (2019)
Emerging economies
Advanced economies
South Africa
Sources: IMF and SARB
Inflation pressure from public sector prices
2019/10/01

y/y (%)
Public and private CPI
Government CPI
Headline excl. government CPI
Headline CPI
Government CPI is a combination of Assessment rates; Water; Electricity; Petrol taxes; Trains; Motorlicence and registration fees; Communication; Education; University
boarding fees; SABC TV licence; Lotto; Alcoholic beverages and tobacco; Non-alcoholic beverages: Soft drinks.
Sources: Stats SA and SARB
Oil price
collapse
Lower inflation provided some policy space
2019/10/01


%
Actual
Mar 2019
May 2019
Jul 2019
Sep 2019
Source: SARB
Evolution of the QPM repo path

%
Interest rates
Repo rate
Prime lending rate
Source: SARB
Real repo mostly around the neutral rate
2019/10/01

Risk feeding into neutral, constraining monetary policy
2019/10/01

Conclusions
• Two big risks in the environment – trade and fiscal
• Short-run growth constrained, long-run dependent on investment
• Actual growth even lower, so output gap negative
• Policy steering inflation (& expectations) to the midpoint of the 3-6% range
• Lower inflation + lower risk = space for lower rates
2019/10/01