by Paul Makube, Senior Agricultural economist at FNB Agri-Business
After a brief hiatus with the government absorbing about R500 million of the fuel hike and only allowing 5 cents increase in September, the situation has deteriorated with the recent announcement by the Department of Energy (DoE) report showing that petrol prices will jump by 99 cents and R1/ litre for the two grades (93 and 95 Octane, ULP and LRP) respectively and diesel recording the biggest increase of R1,24/ litre for all the grades from October 3rd.
This unavoidable increase is largely due to the combination of rising world crude oil prices and a weaker rand. The earlier intervention by the DoE to limit the fuel increase to only five cents per litre to cover the costs of wage increases of frontline staff at service stations was only once off and anyway would still be unsustainable given the precarious state finances. This is certainly expected to place a further strain on consumers and will hurt consumption growth in a weak economy.
The SARB earlier indicated that household consumption has already fallen by 1,3% in the second quarter of 2018 as spending on goods declined particularly durables which were down 11,2%.
Small business and the poorer households will bear the brunt as their transport costs account for a large portion of household expenditure and the consequence of a sustained fuel price increases will further erode disposable income and cause financial stress. This will force a change in spending patterns with a cut in spending on luxury items and frequency of visits to eateries.
We might face a dim festive season if the current pace of fuel prices increases is sustained in the two months ahead.
At producer level, the impact will be cost pressures as we head into the new planting season for summer crops. The higher crude oil price, which has now breached the US$80/barrel level, is a double whammy due to the direct influence on the fuel price and the indirect influence on oil derivatives such as fertilizer, pesticides and herbicides (agrochemicals) all of which are inputs in crop farming.
This will squeeze profit margins if agriculture commodity prices do keep up with the pace of input cost increases.