Producer price inflation in focus this week

Producer price inflation in focus this week

FMCG SUPPLIER NEWS

Business Live - Jan 23rd, 07:48

Once again, there's no shortage of local economic data this week, but the spotlight is likely to fall on the producer price inflation data for December. 

Standard Bank economist Thabi Leoka says producer price inflation PPI is expected to remain at elevated levels, but that we are likely to see a slight moderation for December.

"The risk to the inflation outlook is largely an exogenous one, led mainly by commodity prices. We are particularly concerned by the price of electricity, which has been an important driver of inflation - an increase of 17.3% y/y is assumed for both 2012 and 2013," adds Leoka.

Econometrix economist Manqoba Madinane points out that the year on year growth rate in headline Producer Price Inflation (PPI) escalated significantly throughout 2011, from 5.5% in January to 10.6% in October. However, a fall in the y/y growth rate in PPI for mining and quarrying (from 17% to 14.4%) and PPI for electricity (from 26.9% to 24.9%) between October and November 2011 saw headline PPI growth slow to 10.1% y/y in November.

"This decrease may be short-lived given that several upside risk factors are still in place. Firstly, the Rand exchange rate depreciated 0.6% m/m in December to average 8.20 against the US dollar - which would have increased cost push pressures in the domestic supply chain for the month. Also concerning is the rise in PPI for imported commodities, which increased 12.4% y/y and then 15.9% y/y in October and November 2011 respectively.

"Given a historical +0.94 correlation between PPI for imported commodities and the headline PPI index since January 2000, the cumulative 28.3% y/y build-up in PPI for imported commodities between October and November 2011 favours a rise in the headline PPI index for December 2011," Madinane adds.

Also of import this week will be statistics of liquidations and insolvencies for December.

While the general growth trend in total liquidations has been negative throughout 2011, with average y/y growth to November at -7.2%, the sharp 15.7% y/y rise in liquidations in November gives a tentative sign that business balance sheet distress may be on the rise, according to Madinane.

"This, he says, "is certainly more apparent when one looks at the absolute number of liquidations figures that have increased from 156 in June 2011 to 398 in November 2011. Further to this, voluntary liquidations have risen from 77 in May 2011 to 324 in November 2011. The exponential growth in the number of voluntary liquidations shows that business confidence has waned since May 2011 and could continue to do so as long as domestic economic growth prognosis remains anaemic."

Madinane adds that the fall in business confidence augurs negatively for investor confidence, which could have adverse consequences on the Rand exchange rate - or at least its short term volatility.

Looking ahead, he says, there is some reason to expect a continued increase in the number of liquidations in months to come despite the Reserve Bank leaving interest rates unchanged at its policy meeting on Thursday.

"Firstly, despite the negative y/y growth trend in civil summonses for debt due to statistical base effects, the trend in absolute terms is rising. The absolute number of civil summonses for debt increased 4.0% m/m to over 89K in November, forewarning of a positive feedback into the number of liquidations - which may not reflect in December figures, but certainly in months ahead.

"Secondly, rising input cost pressures, as seen through the cumulative 47.1% y/y rise in PPI since June 2011, in a lacklustre domestic economic climate implies that business profitability is taking a knock, which favours a rise in liquidations and insolvencies going forward," Madinane predicts.

Liquidations and insolvencies are due for release on Monday, as are the November tourist accommodation statistics, November land transport survey as well as the November food and beverages statistics.

Tuesday sees the release of the fourth quarter labour force survey and the Crop Estimates Committee's 6th winter production forecast and the preliminary estimate for the summer area planted.