Marcus’ strong message about the economy

The South African Reserve Bank governor, Gill Marcus, issued what might pass as one of the most remarkable observations about the state of the South African economy.

Addressing the Bureau for Economic Research Annual Conference yesterday Marcus’ speech also passes as one of the most powerful defenses of decisions made by the bank in the past few months and most recently when it kept interest rates flat amid signs of further economic slowdown.

Marcus message was extraordinarily strong. She carefully deployed phrases like “extremely precarious” on the outlook for growth, “structural constraints” and “challenges of crisis proportions”. On solutions she called for “decisive leadership”

Two weeks ago the Monetary Policy Committee of the Reserve Bank decided to keep the repo rate flat at 5%. This was met by an outcry which became loud last week as 2013 first quarter numbers came out showing economic growth had slowed down significantly to 0.9% from 2.1% in the fourth quarter of 2012.

Observers including the Congress of South African Trade Unions (Coastu) lamented a lost opportunity to cut rates in order to support an ailing economy.

Marcus said South Africa had to deal with structural constraints to address economic growth. “…monetary policy cannot deal with structural constraints. All too often it seems easier to place expectations on monetary policy to respond and thereby avoid the more difficult task of dealing with these constraints”.

Marcus said the current stance of monetary policy is accommodative of economic growth concerns. It is accommodative “in the sense that the real policy rate is negative, around minus one percent, compared with a positive pre-crisis average of around 3,5 per cent”.

This is the fact that “inflation outlook is very close to the upper end of the target range, with upside risks”.

Added Marcus: “Our tolerance of this uncomfortable position, however, is recognition of the weak state of the economy which justifies this stance”.

“But the monetary policy stance is also dependent on the fact that our inflation forecast does not suggest that inflation will accelerate significantly away from the target, and that inflation expectations remain more or less anchored, albeit at the upper end of the target range. In addition, inflation appears to be driven primarily by exogenous factors, while core inflation appears to be relatively contained”.

Marcus did say that it is reasonable to raise a question as to whether there is room for further accommodation. “Our view is that risks have increased in both directions. We have limited room for manoeuvre, despite the lower-than-expected first quarter GDP growth outcome and further downside risk to our growth forecast of 2,4 per cent”.

She added that a host of domestic and foreign exogenous issues were make the outlook for growth “extremely precarious”.

“These are not issues that monetary policy can solve”.

She said there were significant upside risks to the inflation outlook coming from the exchange rate and possibly from wage settlements in excess of inflation and productivity increases.

“The Bank’s estimate of the pass-through coefficient from the exchange rate to consumer prices is around 0,2 i.e a 10 per cent depreciation results in a 2 percentage point increase in the inflation rate,” said Marcus.

“However, this happens with a lag, and is dependent on perceptions of how permanent the move is and the state of the business cycle”.

“… Should current levels of both product prices and the exchange rate persist, we can expect a sizeable increase in the petrol price in July”.

Added Marcus “In essence, while monetary policy remains tolerant of inflation at the upper end of the target range or of temporary breaches, the increasingly risky outlook for inflation, and its possible impact on inflation expectations, does constrain further accommodation”.

Marcus said the Reserve Bank will continue to focus on its expanded mandate and stands ready to play its part.

Marcus said the South African economy was facing challenges of crisis proportions. The crisis “requires a coordinated and coherent range of policy responses, which are largely beyond the scope of monetary and macroprudential policies alone to deal with”.

She said “Since the advent of democracy, South Africa has had a growth rate that averaged almost 3,5 per cent. According to the IMF, the policies that have been implemented have resulted in a 40 per cent increase in real per capita GDP, and a drop in the poverty rate of around 10 per cent. These are significant, meaningful achievements”.

“Notwithstanding this the recent dismal growth performance and the vulnerabilities referred to earlier mask layers of deep-rooted structural problems that manifest themselves in high levels of unemployment and massive inequalities. These in turn are caused by weak competitiveness, a poor skills profile and an educational system that, in parts, is dysfunctional, low domestic savings, low investment, uncompetitive product and labour markets and spatial distortions”.

South Africa’s response should be focused on three strands, said Marcus. “Firstly, we require clear actions to stabilise the labour relations nvironment. Secondly, the country has to take steps to address some of the areas of short term vulnerability”.

Thirdly added Marcus a clear programme of reform is required to boost medium to longer term growth. “Much more important than the precise elements of a strategy is for government to be decisive, act coherently and exhibit strong and focused leadership from the top”.

“There is clear recognition that South Africa faces significant challenges; what is required is decisive leadership from all role players that consistently demonstrates a coordinated plan of action to address them. This will go a long way to restoring confidence, credibility and trust”.

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