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Double whammy for consumers in South Africa

With South Africa’s petrol price set to reach record levels in July, inflation is expected to surpass the 7% range, says Himal Parbhoo, chief executive of FNB Retail Cash Investments.

Staff Writer | Business Tech

The government said Monday (4 July) that it will end a temporary reduction in the fuel levy in August as it announced a 10.6% increase in the petrol price, Bloomberg reported.

The reduction of R1.50 in the general fuel levy that applied from April will be trimmed to 75 cents from July 6 and will be withdrawn from 3 August the Department of Mineral Resources and Energy said.

The price adjustments are as follows:

  • Petrol (both 93 ULP and LRP) will increase by R2.37 per litre;
  • Both grades of petrol 95 will increase by R2.57 per litre;
  • 0.05% sulphur diesel will increase by R2.31 per litre;
  • Diesel 0.005% sulphur will increase by some R2.30 per litre;
  • The price of wholesale illuminating paraffin will increase by R1.66 per litre.

The increases will place further pressure on household finances and inflation that already breached the top of the central bank’s target band for the first time in five years in May. Fuel has a weighting of almost 5% in South Africa’s consumer price basket, Bloomberg said.

Petrol retail costs have surged by 36% since the start of the year, increasing calls by opposition parties and labour groups for the government to deregulate the price. However, the Fuel Retailers Association has warned such a move could result in making it even more expensive for consumers.

On the surface, a steep increase in the fuel price looks to impact those with vehicles the most, however, when digging deeper, the increase is far-reaching, said Parbhoo.

“To successfully save, consumers need to outperform inflation. When returns are lower than there is an increase in the cost of living, wealth is working backwards as capital balances will be able to buy less. Increasing fuel prices, means higher returns need to be achieved for wealth to maintain or increase in value.” With CPI reading 6.5% in May, savers need to ensure their money is growing at a higher rate, Parbhoo said.

“Traditional saving accounts may not offer higher enough returns to outperform inflation and thus alternative savings instruments like notice accounts, fixed deposits, money market accounts or funds should be considered by South African savers.”

Parbhoo said the Russian-Ukraine war and sanctions may likely impose further increases in fuel prices through 2022.

“Consumers, savers, and retirees need to try and be prepared especially when it comes to the knock-on effect of fuel prices to goods and services.

“They must use their short-term savings account and money market account to cater for higher prices of goods and services instead of tapping into their long-term investments. It is important for people to consider smart changes can be made in how they spend their money”.

Agriculture woes

Paul Makube, senior agricultural economist at FNB Agri-Business said that the producer prices have recently accelerated faster than the consumer prices which reflects the impact of the mounting cost pressures emanating from a combination of fuel prices and limited availability of certain inputs due to the global supply chain bottlenecks.

“The combination of higher debt serving costs in a record-high input cost environment will continue to erode farmer producer margins and may force those that had already been in a dire financial situation to quit.

“The escalation in fuel costs manifest differently from harvesting to distribution of produce. Grain producers and logistics companies in the agriculture value chain will feel the pain as closer to 80% of grain is transported by road,” said Makube.

Livestock and horticulture with citrus export season currently in full swing will also be affected in terms of distribution across the country and for exports, the economist said.

On the consumer front, the latest update shows the 2Q2022 FNB/BER Consumer Confidence Index (CCI) remained on the downside for the second consecutive quarter signalling a potential contraction in consumer spending in the medium term. The 2Q2022 CCI dropped sharply to -25 points following a decrease to -13 index points in 1Q2022.

Reduced spending may dampen demand and subsequently prices for produce despite input costs unrelenting at elevated levels, thus a potential squeeze on producer margins in the near term said FNB.

Rising price pressures

Economists at Momentum Investments said in a research note that akin to 2021, household spending is likely to be the primary driver of economic activity this year. Healthy household balance sheets at an aggregate level, a mild recovery in employment, a further recovery in wage growth and some improvement in credit growth should support household spending in 2022,  the financial services firm said.

“We are less optimistic about fixed investment providing major support to economic growth this year given that nearly 80% of manufacturers in SA believe that an uncertain political climate is hindering investment prospects in SA.

“Moreover, 60% of manufacturers rate insufficient demand as a significant barrier to investment in the country,” said Sanisha Packirisamy, economist at Momentum Investments.

An increased incidence of load shedding continues to impede a faster economic recovery. Although Codera Analytics has shown that the country’s electricity intensity started to drop off even before the global financial crisis, Nedbank suggests that the gap between demand and supply will remain in place until 2025, the economist said.

Additionally, headwinds to growth in South Africa’s top 10 export destinations point to softer demand for local exports. “As such, we expect the SA economy to grow at 2.2% in 2022 and 1.6% in 2023, said Packirisamy.

Momentum said that rising price pressures have mostly hit the local economy at a headline level. The Russia-Ukraine war has affected the global grains and vegetable oils trade, while severe flood damage in KwaZulu-Natal and rising input costs have added a layer of price pressure.

“The hit to food prices is felt disproportionately,” said Packirisamy. Although food contributes 15.3% to the overall consumer basket, this proportion varies widely by expenditure decile. The bottom 30% of spenders in SA apportion anywhere between 40% and 50% of total spending on food, whereas the top 30% of spenders in the economy spend around 10% to 20% on food items.”

Packirisamy said that surging fuel and food costs are likely to drive headline inflation to around 6.5% on average for this year, before sliding back to below 5% for next year, while Momentum expects core inflation to remain more contained, closer to the midpoint of the target range.

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