South Africa faces decade-long Japan-style deflationary economic spiral


South Africa faces decade-long Japan-style deflationary economic spiral

SARB will ultimately make 180° turn and cut rates to forestall recession, social unrest

A deadly combination of demographic, structural, policy and global financial factors are pushing South Africa into a possible decade-long Japan style deflationary economic spiral. The current South African central bank hawkish policy is increasingly politically untenable ahead of the 2019 elections as both the CPI and GDP price deflators continue to deflate. The central bank is likely to reverse course ahead of the tight early 2019 general elections in a bid to nip the growing cry for a nationalization of the central bank. Ultimately in the medium-term, the South African Reserve Bank (SARB) will have to adopt extraordinary measures like those being undertaken in Japan if the country’s decelerating economy is to avoid a decade-long recessionary trap which could ferment serious social unrest and see the ruling African National Congress (ANC) booted from power. With manufacturing, construction, mining, the agricultural sector and consumer spending contracting, or experiencing anemic growth, South Africa’s structural inflationary pressures are fast receding. Even the SARB’s worry about crude import prices may be unfounded as the forward curve of CME Brent oil futures implies much lower crude prices into 2025.

Eskom’s recent forecasts that domestic electricity in South Africa will continue to contract are some of the starkest signs of a growing economic deflationary risk. (Notes Attached)

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