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Will Tito win the war against inflation and is it worth fighting? The two main drivers of inflation are food and oil and he has no control over either. Hiking interest rates is not going to control food or oil. It is like kicking your dog because your wife is fighting with you. He acknowledges that he is fighting a losing battle but he continues to fire just in case.
Does Tito have the right mandate? It is argued that by controlling inflation, an economy is able to grow on a stable and consistent basis. That is probably true for a developed economy like the USA but we are a developing economy and we should not use First World tools on our unique economy. We need our own solutions to our own unique problems and we should not simply copy other countries. There is no other country like South Africa and we should find our own answers to our problems.
Due to the huge economic imbalances in our country it is short-sighted to expect low wage earners to accept low wage increases due to our low inflation target. Once our imbalances are corrected and we have become a normalised economy, then we can implement traditional developed economic strategies. However, this process will probably take generations and we might not see this happen in our lifetime.
Has Tito given the interest rate hikes enough time to filter into the economy? Interest rate hikes normally take 18 months to have a real effect on the economy. He simply has not given them enough time to do their job. He has been too impatient and emotional. It is like a naughty varsity student eating dagga cookies. He has one but nothing happens, so he takes another. Still, nothing happens so he eats another. Eventually, the first one kicks in. By the time the second one kicks in, he wishes he never had done this crazy idea in the first place but it’s too late and the damage is done. The third one is still to come and that is Armageddon.
There are clear signs that the economy is slowing and he acknowledges that fact. Vehicles sales, manufacturing and property have slowed down. How much more evidence does he need? The world’s biggest economy is slowing down. Nobody knows what impact that will have on the rest of the world. The concern is that the Fed has hiked too aggressively and they now need to correct their overzealousness. We cannot continue to buck global macro trends. Why are we always behind the curve? Haven’t we done this before and why can’t we learn from our past mistakes? The US Fed’s focus was inflation and now it’s economic growth. When will we change our focus?
The US Fed has helped Tito do his job by setting an example and the National Credit Act is his trump card which he seems to be underestimating. The National Credit Act is new to the scene and needs more time to produce results. Tito wants consumers to stop spending. World consumers have been supporting the World’s fragile economy since forever and central banks are squeezing the life out of households. They gave us easy money and encouraged us to spend. We owe more than we earn and now they want to hurt us for our transgressions. Central banks are mainly responsible for the current status quo and they should be more responsible and sensitive to the after affects of their actions. Central banks need a good feel or insight for the economy. Let us hope that Tito has this gift.
Tito has probably done too much. Sometimes doing nothing is better than doing something. Inflation is not outrageously out of control. He should give his actions more time to work and he is being assisted by the National Credit Act, Eskom and global forces. Is there anything wrong with our current inflation rate and is our inflation range appropriate for our economy? Economic forecasts are being lowered and this trend will probably continue. It is unlikely that we will achieve 6% GDP and we will not create enough jobs which we desperately need. He cannot control food and oil. If he thinks that the war against inflation it tough, wait until he realises that the economy has slowed done too dramatically and needs an urgent jump start. When will his focus switch to economic growth and how bad will the damage be?
Article supplied by Thomas Stringfellow (AFPI), Managing Director; Stringfellow Investment Specialists (FSP # 23376), Tel: 0860 787 464 www.stringfellow.co.za
