Johannesburg, 29 November 2018 – Businesses in the metals and engineering (M&E) cluster are unlikely to benefit from a continuous increase in the selling price inflation in October 2018, given the current domestic economic environment underpinned by high petrol prices and an up-tick in both the prime interest rate and inflation, the Steel and Engineering Industries Federation of Southern Africa (SEIFSA) said today.
Speaking after today’s release of Producer Price Index (PPI) figures by Statistics South Africa (StatsSA), SEIFSA Chief Economist Michael Ade said the latest release shows the annual percentage change in the PPI for final manufactured goods was 6,9% in October 2018, compared with 6,2% in September 2018. The data also shows a less-than- proportionate increase in the PPI for intermediate manufactured goods, considered a proxy for selling price inflation, from 7,7% in September 2018 to 7,4%. From September 2018 to October 2018, the PPI for intermediate manufactured goods increased by 1,0%.
However, Dr Ade said it is worrisome to note that notwithstanding the improving trend in selling price inflation for intermediate manufactured goods, companies are still constrained by derived logistics costs from high fuel prices and the double whammy of rising prices and higher prime interest rate.
“As captured by recent official releases from StatsSA and the South African Reserve Bank, the headline CPI correspondingly increased from 4,9% in September 2018 to 5,1% in October 2018, alongside the interest rate which increased from 6,5% in September to 6,75% in October. These dynamics definitely have the potential of compounding the dire situation of most businesses. The bigger concern is the direct impact on the depleting margins of companies, with dreadful extended socio-economic consequences on the broader economy,” Dr Ade said.
He said the direct transmission effects of the negative shocks arising from inflation, high costs of servicing existing loans and from snowballing borrowing costs from the financial service providers will impact negatively on consumer demand, thereby reducing the ability of producers to increase selling prices.
Dr Ade said that given that most of the intermediate goods produced in the M&E cluster are further utilised in the production of final manufactured goods which are largely consumed by domestic consumers, the reverse knock-on effect on the M&E cluster will be huge. He said the sharp deterioration in both the consumer and business confidence indices, as captured by the FNB/BER confidence indices, was equally of concern. .
The data reflect consumer confidence dipping from 22 in the second quarter to 7 in the third quarter of the year, while business confidence also fell from 40 in the second quarter to 34 in the third quarter. The bleak picture is further corroborated by the poor performance of the Absa business expectation index, which slowed down from 45,8 in September to 41,7 in October, in the midst of a technical recession and low domestic demand.
Dr Ade said that the lack of demand will invariably affect the speed with which intermediate manufactured goods leave the factories, steel mills, foundries, smelters and warehouses.
“Also, given the direct correlation that exists between changes in the PPI at the retail level (finished goods) and consumers at the point of sale, increases in both inflation and the cost of borrowing will adversely affect the speed at which manufactured goods are sold. Given these constraints, businesses are unlikely to benefit from prevailing increasing selling price inflation as it becomes difficult to pass price increases on to the final consumers continuously,” Dr Ade said.
In conclusion, Dr Ade pointed out that the PPI for the final and intermediate manufactured goods are important drivers of consumer demand. He said both indicators also generally act as a preview of changes in the rate of inflation.
Dr Ade cautioned that, in analysing both trends, businesses should also give significant consideration to other drivers of consumer spending.