R30 petrol: The shock our country cannot afford

There is a number that should make every South African sit up and take notice: R30 a litre.

That is where 95 unleaded petrol is expected to go next week when the latest fuel-price adjustment takes effect, with diesel expected to rise above R33 a litre.

According to the Central Energy Fund’s latest calculation, inland 95 petrol could increase by about R3.21 a litre, from R26.92 to roughly R30.13. Diesel is facing increases of around R3 a litre. While the final adjustment is to be announced, the new prices are expected to take effect on October 7.

This is about far more than the cost of filling a tank. Fuel is an input into almost every part of the economy. It moves people and goods and affects farming, manufacturing, construction, logistics and virtually every business that depends on transport. When diesel prices rise sharply, those costs filter through to the prices consumers pay for goods and services.

Economists refer to this as cost-push inflation.

South Africa is being hit by this shock at a difficult moment.

The fuel increase is being driven largely by higher international oil prices and a weaker rand. Brent crude ended September at around $100 (R1 700) a barrel, while the rand weakened against the dollar.

Exchange rates are influenced by global interest rates, bond yields, investor sentiment, commodity prices and domestic economic conditions. The US Federal Reserve raised rates by 25 basis points in September to 3.75%-4%, while the South African Reserve Bank increased its repo rate by 25 basis points to 7.25%. Higher global interest rates can encourage investors to shift capital towards developed markets. At the same time, a weaker rand raises the cost of imported fuel and other goods.

The result is a triple squeeze: higher fuel prices, a weaker currency and higher interest rates, affecting an economy struggling to generate meaningful growth.

South Africa’s inflation rate stood at 4.4% in August but the Reserve Bank has warned that inflation will probably move above 5% later this year and into early next year.

The danger is the increase in the petrol price spreads through the economy. Transport costs rise. Businesses face higher operating expenses. Producers increase prices. Consumers have less disposable income. Spending elsewhere declines. Companies become more cautious about investment and hiring. The multiplier effect begins working in reverse.

The economic growth forecast remains 1.2% for the year. However, the economy contracted by 0.2% in the second quarter after growing by 0.4% in the first quarter. Manufacturing declined by 1.8%, while mining shrank by 3%.

The Reserve Bank expects a recovery during the second half of the year but it has also acknowledged that risks to growth are tilted to the downside.

What happens if that recovery does not materialise?

Negative real growth cannot simply be dismissed. It has become a risk that deserves serious consideration. The consequences would be significant. South Africa is not entering a potential slowdown from a position of strength. Unemployment
remains high. Investment is weak. Businesses are under pressure and households are grappling with rising living costs. That is why economic growth is the mechanism through which jobs are created, incomes expand, investment is attracted and households gain financial breathing room.

Without growth, the cycle turns negative. Higher fuel costs reduce disposable income. Rising production expenses squeeze business margins. Inflation puts pressure on interest rates. Higher borrowing costs suppress spending and investment. Softer demand then discourages companies from expanding or hiring.

That is the negative multiplier effect. It is something South Africa can ill afford.

The country cannot control global oil prices, geopolitical tension in the Middle East, US monetary policy or international capital flows. What it can influence is whether the domestic economy is resilient enough to absorb those external shocks.

The question is whether South Africa can continue absorbing one shock after another without undermining the growth it so desperately needs.

For a country facing deep unemployment, inequality and economic challenges, the question is one that should concern every South African.

• Maarten van Doesburgh is an economist, head of economics at CPUT, CEO of Economics Investment Group and a regular commentator on South Africa’s economic landscape.