Independent economist John Loos expects the ongoing Middle East conflict to lead to postponable end-of-year spending as well as an interest-rate hike.
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SIMON BROWN: I’m chatting now with John Loos, independent economist. John, I appreciate the time. A note you put out talking around the lack of a resolution to the Middle East conflict sort of imposing risks to the year-end festive spending that we typically see in South Africa.
Wednesday saw petrol up 134 cents, diesel around R3. This is perhaps the single biggest concern in that it directly removes money from the consumer’s pocket. We are travelling and it’s just costing more – and immediately it hurts. And that is going to put pressure in the immediate and down the line.
JOHN LOOS: Yes, Simon. I’d hoped for a resolution to the conflict by now, and for significantly lower oil prices, but we’re not seeing it. Brent crude this morning was at $95-ish a barrel when I last looked.
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SIMON BROWN: Yes.
JOHN LOOS: And possible further petrol price hikes to come next month. It’s early days, though. But I think this is the problem. This whole conflict affects us in three different ways. Firstly, there’s a global growth impact, and the IMF does forecast slower global growth for this year than last year. That can affect demand for our exports and affect our economy and job creation. So, that’s the first direct impact.
Then, of course, there’s the direct inflationary impact we see at the pump prices. That’s coming through and there’s the general inflationary impact of that, which can lead to interest-rate hiking.
I think the Sarb will hike one further by another 25 basis points. So that takes disposable income out by increasing the cost of servicing debt.
So there’s a triple whammy. It doesn’t mean recession and disaster, but it just looks more and more like as we move towards festive season consumer spend that might be flatlining by the end of the year if we don’t get a resolution to this conflict fairly soon.
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SIMON BROWN: We got the hike from the Sarb in May, 25 points – that was largely expected. Inflation peaked at 5%; it’s down at 4.3%. But I think the truer part about inflation is that it’s volatile and remains well above the 3% target. Two meetings left this year – one later this month, one in November.
And you’re saying you’re fairly confident. I’m not sure the Sarb has any choice here if they want to remain relevant to the process.
Inflation’s going to be well outside the target. They might have paused at the last meeting, but it does look like one of those meetings is going to be a hike. And I think maybe at the sooner rather than the later one.
JOHN LOOS: Yes, it’s tough to say exactly when they’ll hike, or whatever. But I do believe at one of the meetings there will be a hike, because I think that what we could see when we get the next month’s inflation numbers is a rise again.
It came down from 5% to 4.3% because year-on-year petrol price inflation slowed quite dramatically a month or two ago. But now that’s reversed again. So you could see CPI inflation ticking up higher than the 4.3%. And then, yes, that’s probably the time, I think, for the Sarb to hike another time.
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SIMON BROWN: The IMF is still looking at around 3% global growth for the year, but a lot of that on the AI investment boom – and I’m not sure how much that cushions us. We don’t have much AI here. It is fairly concentrated, you know – HVAC [heating, ventilation, and air conditioning] suppliers and data centres and the like, and we might not get much impact from that. As you say upfront, maybe not recession, but that growth is going to be lacking.
JOHN LOOS: Yes, if we look at export-driven sectors already, the manufacturing sector is in recession, and the latest PMI New Sales Orders index, which is a leading indicator for the economy, was down to 40-odd.
Mining output growth in recent months has turned negative after a previous period of solid growth.
SIMON BROWN: Yes.
JOHN LOOS: Those are heavily export-dependent sectors, and they’re not looking good at the moment. So I think there is some negative impact from the world economy possibly starting to filter into our numbers.
As you say, not only do we not benefit hugely from the AI investment boom, but on that too there’s a lot of speculation as to whether that’s in a bubble now, and the chickens might come home to roost there fairly soon.
So that’s an uncertain environment in itself. It’s not just about the Iran war. The global economic environment is not in our favour, I think, at the moment.
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SIMON BROWN: A last question. Household consumption last year was at 3.6% growth; you’re looking for 1.6% this year. What disappears first from the spending? I imagine it’s discretionary – it’s going to be travel, it’s maybe going to be holidays.
It might be smaller turkeys on the Christmas table. Households are going to be making stark decisions, and they’re going to be finding those discretionary items and cutting or reducing.
JOHN LOOS: Yes, and I think I think the discretionary – well, firstly, the credit-dependents demand, the vehicle sales and the housing demand, that often normally slows when interest rates go up, so you see an impact there.
But yes, when it comes to the discretionary spending, holiday-related spending growth might be under pressure because it’s transport cost-related. And that filters through to tourism accommodation to a certain degree.
But then it’s also postponable spending, that work that you wanted to do on your house. We are already seeing hardware retail sales in negative territory. You can often live in your house that needs a bit of repair for a bit longer. So, postponables can also take a bit a backseat during times like this.
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So I think that’s what we’re starting to see play out in some of these spending categories already, and probably more of that towards the end of the year.
SIMON BROWN: Postponables – I hadn’t thought of that as a sector, but absolutely, there’s stuff which we can say, ‘Hey, that can happen later’.
We’ll leave it there. John Loos, independent economist, appreciate the early morning time.
