NOMPU SIZIBA: South African motorists will be able to take a bit of a financial breather tonight. Following a sharp increase in fuel prices in April, which included the new fuel taxes, fuel prices are set to come down at midnight tonight. The price of petrol will come down by nine cents a litre, while the price of diesel will be down by 31 cents a litre, with illuminating paraffin also declining by 30 cents a litre. This will bring some relief to consumers who are faced with a barrage of costs in an economic environment where losing jobs and wage cuts have seemingly become the norm. Well, to get his take on the latest developments and the kind of impact he thinks these adjustments will have on the economy, I’m joined on the line by Mike Schüssler, the chief economist at Economists.com.za.
Thank you so much, Mike, for joining us, as always. The fuel price decreases are a bit of relief for the consumer, for firms and the economy at large. But is it really that significant?
MIKE SCHÜSSLER: No, it’s not significant. But here’s the interesting thing. The price, although it’s coming down, is going to be the highest increase that we’ve seen on a year-ago basis, Nompu, since 2008. And the reason for that is – remember last year we had that massive decline in oil prices, where we were all learning a lesson about how hedging and forward storage and puts and options work, and we saw the oil price, remember, at one stage minus $37/barrel. So someone was actually paying you to take the oil.
Well, this year the reverse is true. We are seeing a small decrease on a monthly basis, but we are seeing a massive increase on a yearly basis due to that – let’s call it – deflationary and strange effect due to the pandemic. I don’t think we’ll see again a negative oil price. It’s like walking into a Pick n Pay and somebody says to you, “Buy as much as you want, and we’ll pay you”. Remember, that was a very, very different era to maybe now, but that’s literally what we are comparing it to.
NOMPU SIZIBA: So given that context that you’ve just painted for us, how would you say that the consumer’s faring a year-and-a-bit post the beginning of the Coronavirus hitting our shores?
MIKE SCHÜSSLER: I think the consumer has recovered quite a lot. But that was in a low-inflation environment, low-interest environment, and very high spending from government. We know already that some consumers now the 6.5 million people that get the disaster relief fund, are disappearing, although those are not the type of people that would be putting petrol in in cars, because they would not probably have cars.
But I think we’re getting towards the end of the bounce back, and the big, rapid recovery that we saw is probably behind us. And I think the oil price pressure of 41% higher than a year ago is going to hurt the consumer, along with things like electricity. We’ve seen very big increases in food prices. I don’t know when that’s coming through fully to South Africa. But the corn price on a monthly average went up 74% in rand; I think a bit more in dollar terms – eighty-something percent.
Those are huge increases. So I think we’re very near the end of all the relief that the consumer had during the pandemic and the lockdown, and I think we’re going to see a much more honest picture in the next few months.
NOMPU SIZIBA: When it comes to businesses, it does seem that their costs of doing business remain quite elevated. And of course you mentioned electricity prices – we’re going to see those kicking in full in July. How do you see the terrain for them?
MIKE SCHÜSSLER: I think businesses are probably not going to be able to give the full impact of price increases through, whether it’s meat or chicken or anything else. In fact, it’s going to be difficult. But obviously petrol prices are a given because it’s a government pricing system.
I think businesses are likely to see slower growth than they had before, but also I think businesses are probably better able now to withstand the pressures than they were a year ago. So understandably the world economy is be bouncing back, but with that it means that the cost pressures, low interest rates, are probably nearer the end than at the beginning, and that immediately might mean in a year or so we’re going to see increases in interest rates internationally.
But I think we are seeing businesses with a little bit more pain than before, and obviously there will be some businesses in this process will lose out. But in general, I think businesses would be better able to handle it that they would have a year ago.
NOMPU SIZIBA: Yes. So businesses have a certain level of resilience, but it sounds like they’re only just managing to be in survival mode, given the fact that, like you say, they can’t necessarily make profit because it’s difficult to pass on the cost to the consumer.
How would that then affect things like business confidence? If you don’t have that business confidence, then you’re not going to have people being willing to invest that much more in their businesses.
MIKE SCHÜSSLER: Well, I think we were already in a sort of negative investment environment for a while, Nompu, because the profits, as you say, weren’t there. The cashflow of most businesses is good in South Africa. It’s definitely not negative, and that’s the one thing that’s made businesses survive. But cashflow is not profit, because that doesn’t take into account things like depreciation and your buying and selling of non-core assets. The fact of the matter is businesses in South Africa are, let’s say, not in a desperate situation, but there are not going to invest until they feel a lot more confident. Business confidence can go up a step or two still, and we will still not have that investment. So I think it will still be under 50%; 50% is a neutral mark for business confidence.
But we are moving slowly in the right direction. Now, if we can get better profit in, say, the next six or eight months or maybe a year, that would be very helpful. In some areas you will see that because of the commodity price bounce-back, and very high commodity prices that we are seeing in some areas. That obviously for South Africa has always been a good sign.
The question is: how long does that carry on, and can we make use of it? That’s the tricky question to answer. I hope we can. But I think at this moment in time, we’re not seeing the big rise in iron-ore exports, or coal exports, that one would have expected with these commodity prices. Some things are technical, there are things like locusts and derailings and stuff like that, and those that can be fixed quite quickly. The question is: will business be expanding the production capabilities on the mining side? Once that happens it’ll lift the manufacturing, it’ll lift employment and all those sorts of things.
So we’d better hope that there are relaxations in the mineral rights or wherever we need them to pull this off.
NOMPU SIZIBA: Well, we’ll watch the space. Mike, thank you very much. Always great to talk to you. Mike Schüssler is the chief economist at Economists.co.za.