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Tensions grow in South African economy

LABOUR unrest in South Africa's mines, which threatens to spread to bigger sectors like manufacturing, is plunging the economy into a vicious cycle that may spiral into stagflation, disinvestment and more social upheaval.

South Africa's rand has lost 16pc against the dollar so far in 2013 and hit new four-year lows this week, with mining worries triggering the latest sell-off – which picked up pace on Tuesday when data showed growth in Africa's top economy slowed to a snail's pace as manufacturing output shrank.

All of this is spooking investors and sowing the seeds of more social discontent, as data shows a strong correlation between the rand's performance against the dollar and inflation, with a time-lag of nine months.

Inflation is currently just under 6pc and will accelerate, with the biggest exchange-rate impact likely on food and fuel prices, which will hit working-class households hard. But the full impact of the rand's current weakness will only be fully felt nine months hence, after the next round of wage agreements in mining and other sectors have been hammered out.

These will be tough as worker militancy is on the rise amid a vicious turf war between a mining union linked to the ruling African National Congress and a more militant rival.

Strikes are a certainty, which will strain incomes and knock the rand further, and any wage gains wrested from companies will mostly be devoured by inflation soon after.

"There is a nine-month lag which generates the highest correlation between the depreciation of the rand and the impact on inflation," said George Glynos, managing director at financial consultancy ETM Analytics.

"Whatever disposable income you negotiate in your wage talks gets eroded away in the months that follow," he said.

This could easily fuel worker anger next year, sparking another round of strikes. Investors in turn would make another stampede for the exits, undermining the rand again and reigniting the whole cycle as inflation was spurred anew.

Of course, this cycle is not set in stone. Strike fatigue may set in with workers, many of whom have high levels of debt, which could temper such action or curtail wage demands.

And the dance between the currency and prices can go two ways.

The rand, a highly liquid emerging market currency, can change direction quickly and put the brakes on inflation.

(Reuters)

Irish Independent