Inflation Brings Temporary Relief, but Economic Challenges Remain

The inflation rate declined to 4.3% in July, while the official unemployment rate increased to 33.6% in the second quarter.

“The decline in inflation is undoubtedly good news. It means that the pace at which prices are rising has slowed somewhat, which could provide some relief to households already under severe financial pressure,” says Thys van Zyl, Chief Executive Officer of Everest Advisory Services (Pty) Ltd (FSP 49495, CAT I).

“However, we should be careful not to confuse lower inflation with a strong economy. South Africa still has millions of people without jobs, weak economic growth and households that are increasingly struggling to make ends meet.”

According to the latest figures, almost 8.5 million South Africans are officially unemployed. Van Zyl says the figures highlight that South Africa’s biggest economic challenge remains the lack of sufficient economic growth and job creation.

“Inflation may stabilise and interest rates may eventually begin to decline, but without meaningful economic growth, the country will not solve its unemployment crisis. Employment is ultimately one of the most important forms of economic empowerment. It provides people with an income, but also with the ability to repay debt, save, build assets and make provision for retirement.”

The position of young South Africans is particularly concerning, with almost five million people between the ages of 15 and 34 unemployed.

“Long-term unemployment does far more than limit someone’s current income. It delays an entire financial life journey. When someone only secures sustainable employment much later in life, it means fewer years in which to gain work experience, less time to save for retirement, a shorter period in which to build assets and often a longer period of dependence on family.”

The latest inflation figure is also likely to play an important role when the South African Reserve Bank’s Monetary Policy Committee meets again in September to decide on interest rates.

In Van Zyl’s view the decline in inflation reduces the immediate pressure for a further interest rate hike, but does not necessarily mean that a rate cut is imminent.

“The Reserve Bank will likely want to see that the downward inflation trend is sustainable before it begins to ease monetary policy. There is still uncertainty surrounding energy prices, geopolitical tensions and underlying price pressures. However, the latest figure strengthens the argument that a further increase may not necessarily be required if inflation continues to decline.”

The Reserve Bank kept the repo rate unchanged at 7% in July after raising it by 25 basis points in May.

According to Van Zyl, a stable interest rate environment will provide households and businesses with a degree of certainty, but monetary policy cannot solve the country’s structural problems.

“The Reserve Bank can attempt to control inflation, but it cannot fix municipalities, eliminate logistical bottlenecks, restore investor confidence or create millions of new jobs. South Africa needs sustained structural reforms, policy certainty, better infrastructure and an environment in which businesses can invest and expand with confidence.”

Van Zyl says the two sets of figures ultimately tell the same story.

“The decline in inflation is a welcome step in the right direction, but South Africa’s economic success cannot be measured solely by what happens to prices. The real test is whether people are finding jobs, earning incomes and becoming financially stronger over time. Until that happens, the country’s economic recovery remains fragile.”