Economics Weekly
By Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole & Koketso Mano
Navigating economic challenges amid delayed interest rate cuts and global uncertainty
Following the weaker-than-expected economic activity during the first quarter, and our updated interest rates view, we have revised our growth projections. Persistent inflation, associated risks, and the delay in the US Fed interest rate cutting cycle underpin our revised domestic interest rate outlook. We now anticipate a delayed initiation of the rate-cutting cycle by the SARB, with the first cut expected to materialise only in November 2024, as opposed to July. Notably, we have scaled back total cuts in the forecast horizon by 50bps, such that the repo rate will only fall to 7.50% by July 2025 from 8.25% currently. The updated profile recognises a shift in the SARB's inflation objective to 3% from 4.5% as reflected in recent engagements. That said, risks to this view are to the downside in the outer period of the forecast horizon. We project headline inflation to fall to 5.2% this year, 4.7% in 2025, and 4.5% in 2026.
The global interest rate environment, particularly the decisions of the US Federal Reserve (US Fed), remains a significant aspect of our latest macroeconomic projections. The US Fed's reaffirmation of its commitment to maintaining high rates to achieve the 2% inflation target, as evidenced by its unanimous decision to maintain the Fed funds rate within the 5.25% to 5.50% range, solidifies our view of a delayed cutting cycle. Given the pivotal role of the US in the global economy, particularly for emerging markets like South Africa, this delay factors into the domestic policy adjustment, ultimately impacting economic outcomes.
Growth trends and projections
In 2023, economic growth slowed to 0.6%, marking a notable decrease from the 1.9% growth recorded in 2022 and the robust 4.7% growth seen in 2021. This moderation was primarily due to the adverse effects of intensified load-shedding, a significant domestic factor affecting economic performance, alongside logistics constraints. Persistent inflation and weak growth in nominal wage income substantially dampened consumer purchasing power, leading to a significant slowdown in overall household consumption expenditure (see forecast table overleaf). On the supply side, various sectors were heavily impacted, including a sharp 12.2% y/y decline in the agricultural sector, a 1.7% y/y decrease in retail and wholesale trade, catering, and accommodation, a 3.8% y/y contraction in electricity, gas, and water, and a 0.3% y/y fall in mining.
While we anticipate the 0.6% economic growth rate from last year to have marked the trough in the cycle, with a modest improvement expected over the forecast period, the outlook is clouded by numerous risks. These include fragile consumer and business confidence, consistent with the weak economic indicators observed so far in the first quarter. For instance, electricity production declined by 1.0% q/q in the first quarter of 2024, following a 2.6% growth in the fourth quarter of 2023. The number of new vehicles sold (seasonally adjusted) declined by 0.2% q/q, reflecting weak passenger car sales. Mining output decreased by 1.4% in the three months ending in February, while manufacturing output remained stagnant at 0.0%. Retail trade volumes dipped by 0.5%, and freight and passenger transportation declined by 1.6% (March data to be released from next week onward).
As a result, we anticipate economic growth to increase to 1.2% this year, revised down by 0.1 percentage point compared to our April projection. Given the lagged impact of relatively high nominal interest rates, economic growth is trimmed lower in the subsequent years, lifting to 1.5% (previously 1.6%) in 2025 and reaching 1.6% (previously 1.8%) by 2026. These growth projections remain below the 2.7% average growth recorded between 2000 and 2019, mainly reflecting the ongoing impact of infrastructure constraints and a less supportive external environment.
Week in review
Private Sector Credit Extension (PSCE) quickened to 5.2% y/y in March, from 3.3% in February, supported by increased demand in the corporate sector. Corporate credit jumped to 5.7%, from a moderate 2.8% in February. General loans, which account for approximately 54% of corporate credit, accelerated to 7.5% in March from 0.9% previously, while instalment credit grew by a robust 16.4%. Mortgages, on the other hand, slowed marginally to 3.3% from 3.4% previously, in line with the anaemic real estate markets. In the household sector, credit uptake slowed from 4.1% to 3.7% in March - the lowest growth rate since March 2021, reflective of tight credit conditions. Mortgages slowed to 3.0% from 3.3% previously, while car finance decelerated to 6.5%, from 7.4% in February. Nevertheless, demand for consumption credit remains strong as consumers struggle to make ends meet. Credit card uptake accelerated to 10.4% in March, from 9.6% previously, the fastest pace since November 2019. Overdrafts also ticked up, to 2.5%, while general loans remained at a low 0.2% y/y. Overall, inflation-adjusted annual PSCE growth has been negative since August 2023, indicating tighter credit conditions and supporting the expectation of interest rate reductions in 2H24.
The trade balance surplus was R7.27 billion in March, reflecting a moderation from a downwardly revised R13.34 billion (previously R14.04 billion) in February. The narrowing of the surplus reflected a slower increase of 1.8% m/m in exports to R164.12 billion, while imports increased relatively faster by 6.1% m/m to R156.85 billion. Year-to-date (YTD), the trade balance surplus was R10.79 billion, underscoring an improvement from a deficit of R5.68 billion over the same period last year. Exports are down by 2.7% YTD, while imports are down by 6.1%. The decline in exports broadly underscores weak mining exports, particularly precious metals and base metals, which are down by 20.0% y/y and 7.3% y/y, respectively. Vehicle exports are up by 21.2% YTD. On imports, the drag primarily reflects a 10.1% YTD decline in mineral products and a 7.1% YTD decline in machinery and equipment.
Following a dip below the neutral 50-point mark in March, the seasonally adjusted Absa Purchasing Managers' Index (PMI) improved in April, rising by 4.8 points to 54. The rebound was supported by improved business activity, while better domestic demand filtered through to higher new sales orders. Factory activity likely benefited from a full month of no load-shedding. Nevertheless, the index for expected business conditions in six months declined to 55.7 in April from 62.1 in March, likely due to expectations of a return of load-shedding in the winter months, as well as fewer interest rate cuts relative to earlier expectations. In all, the survey results reflect a reasonable improvement in operating business conditions at the start to 2Q24.
New vehicle sales rose by 2.2% y/y (814 units) in April, the first increase in eight months. All sub-categories recorded higher annual volumes in April, except light commercial vehicles, which declined by 9.0%. Passenger car sales, which account for over 65% of domestic sales, increased by 6.1% (1 493 units), following nine consecutive months of volumes decline. According to NAAMSA, activity was supported by a full month of no load-shedding. Nevertheless, new vehicle sales are down by 4.0% YTD, reflecting weak demand conditions.
Electricity production (not seasonally adjusted) stagnated at 0.0% y/y in March after expanding by 4.2% y/y in February. On a seasonally adjusted basis, electricity production fell slightly by 0.1% m/m after increasing by 1.5% m/m in February. In 1Q24, electricity production declined by 1.0% q/q, reversing the quarterly growth momentum of 1.1% and 2.6% experienced in 3Q23 and 4Q23, respectively. This poor outcome and the ongoing water infrastructure challenges imply that the electricity, water and gas sector was a drag on the first quarter GDP growth.
Week ahead
On Wednesday, the gross foreign exchange reserves data for April will be released. Gross foreign reserves increased to $62.32 billion in March from $61.65 billion in February, reflecting an increase in gold reserves to $8.91 billion from $8.18 billion that was supported by a higher dollar-denominated gold price. Foreign exchange reserves fell slightly to $47.20 billion from $47.25 billion, highlighting net foreign exchange payments made on behalf of government. Special Drawing Rights holdings also declined slightly to $6.21 billion from $6.23 billion, partly reflecting valuation adjustments as the US dollar appreciated.
On Thursday, manufacturing production data for March will be released. In February, manufacturing output expanded by 4.1% y/y, following an increase of 2.9% y/y in January. Seasonally adjusted manufacturing output shrank by 0.3% m/m after expanding by 0.4% m/m. Annual growth performance was positive across nine out of ten manufacturing divisions, with the wood and wood products, paper, publishing, and printing division expanding by 14.9% y/y. Output in the food and beverages division increased by 5.8% y/y, the petroleum, chemical products, rubber, and plastic products division expanded by 4.7% y/y, and the basic iron and steel, non-ferrous metal products, metal products, and machinery division experienced output growth of 1.3% y/y.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 30 Apr | SA | Private sector credit extension % y/y | Mar | 5.2 | 3.3 |
| SA | Balance of trade Rbn | Mar | 7.3 | 13.3 | |
| 2 May | SA | Absa PMI | Apr | 54.0 | 49.2 |
| SA | New vehicle sales | Apr | 2.2 | -12.2 | |
| SA | Electricity production % m/m | Mar | -0.1 | 1.5 | |
| SA | Electricity production % y/y | Mar | 0.0 | 4.2 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 8 May | SA | Gross foreign exchange reserves $ Bn | Apr | -- | 62.3 |
| 9 May | SA | Manufacturing Production % m/m | Mar | -- | -0.3 |
| 9 May | SA | Manufacturing Production % y/y | Mar | -- | 4.1 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 76046.85 | 2.3% | 2.2% | -2.8% |
| USD/ZAR | 18.58 | -2.4% | -1.0% | 1.7% |
| EUR/ZAR | 19.89 | -2.6% | -1.6% | -1.5% |
| GBP/ZAR | 23.25 | -2.4% | -1.5% | 1.3% |
| Platinum US$/oz. | 949.67 | 3.9% | 3.4% | -9.5% |
| Gold US$/oz. | 2,303.29 | -1.2% | 1.0% | 13.0% |
| Brent US$/oz. | 83.67 | -6.0% | -5.9% | 15.7% |
| SA 10 year bond yield | 11.47 | -2.7% | 0.1% | 6.1% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP % y/y | 4.7 | 1.9 | 0.6 | 1.2 | 1.5 | 1.6 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 0.7 | 1.3 | 1.3 | 1.5 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 4.2 | 4.0 | 4.2 | 3.6 |
| CPI (average) % y/y | 4.5 | 6.9 | 6.0 | 5.2 | 4.7 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.9 | 4.7 | 4.6 |
| Repo rate (year end) % p.a. | 3.75 | 7.00 | 8.25 | 8.00 | 7.50 | 7.50 |
| Prime (year end) % p.a. | 7.25 | 10.50 | 11.75 | 11.50 | 11.00 | 11.00 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.70 | 17.70 | 18.30 |
