Economics weekly
World trade continues to slow amid demand and policy challenges
In this report, we look at South Africa's trade, particularly YTD (January to August) export performance, in the context of global trade developments and what this means for growth and the balance of payments. In its latest global trade outlook, the World Trade Organisation (WTO) reduced its merchandise trade growth forecast to 0.8% for 2023 from an earlier projection of 1.7% in April (Figure 1). Trade growth is expected to pick up to around 3.3% next year. The current-year trade slowdown is broad-based across many countries and various commodities. Last week, the IMF also significantly reduced its global trade (goods and services volumes) forecast to 0.9%, from the 2.0% predicted at the July World Economic Outlook, citing low global demand and rising trade barriers. These developments are critical for export-orientated industries and government revenue derived from export earnings.
The trade channel is not encouraging for domestic growth
South Africa's exports of goods and services (volumes) expanded by 3.7% in the first half of the year, reflecting a moderation from the 6.1% recorded over the corresponding period last year. While this is not encouraging for domestic growth, it is consistent with the global slowdown in trade volumes amid weak global demand (including weak industrial production) and the distinctive impact of ports and rail inefficiencies. Also, more restrictive global trade policies have likely weighed on trade (Figure 2) and has implications for trade activity going forward. The monthly world trade monitor data (up to July) shows that world trade volumes are down by 1.6%, compared to the 4.1% growth recorded over the corresponding period last year. World import (-2.6% YTD) and export weaknesses (-0.6% YTD) underscore this decline. Given that these trade factors are expected to persist, growth in South Africa's export volumes will likely remain constrained into next year, settling below the 2.2% average export growth between 2010 and 2019.
Trade balance compression underpins a wider current account deficit
While the cumulative nominal trade balance (not seasonally adjusted) stood at R32.02 billion at the end of August, it has materially compressed from the R160.46 billion cumulative surplus recorded at the end of August last year. Indeed, merchandise export earnings (in rand terms) are only up by 1.5% YTD. Meanwhile, merchandise import earnings are up by 13.2%. This reflects lower international commodity prices and demand-supply related factors mentioned above. The export earnings performance of various commodities has been mixed, with exports of precious metals down by 14.9% YTD, mineral products down by 5.8% YTD, and chemical products down by 6.3% YTD.
Conversely, vehicle exports and other associated transport equipment are up by 24.7% YTD at R153.22 billion, base metals by 9.3%, and machinery and mechanical appliances by 13.1%. Agricultural commodities, including animal products and vegetables, are also up by 14.2% and 17.7%, respectively. The data is also mixed across sectors, but the YTD general trend clearly shows a weakening contribution of net trade to the current account balance, raising external financing vulnerabilities.
Widening twin deficit to put pressure on the rand
The expected widening of the current account and fiscal deficit amid weak revenue growth and expenditure pressures should weigh on the rand, especially in the context of higher for longer global real interest rates and lower foreign appetite for domestic assets. Specifically, the current account deficit will likely widen to around 2% of GDP this year, with the fiscal deficit expected to overshoot the Treasury's February 2023 estimate of 3.9% of GDP (See IMF's forecasts in Figure 3). The rand is underpriced at our predicted average of R18.50/$ this year when accounting for differentials in SA/US fundamentals. This highlights how foreign investors have had less appetite for SA assets. The JSE weekly statistics (as of 6 October 2023) show that they have been net sellers of SA equities to the tune of R103 billion YTD (Figure 4). Meanwhile, foreign bond purchases have been mild at R12.5 billion YTD, compared to R40.8 billion in the corresponding period last year.
Week in review
Mining output shrank by 2.5% y/y in August after shrinking by a downwardly revised 4.4% y/y (previously -3.6% y/y) in July. Seasonally adjusted output, critical for the calculation of quarterly GDP growth, expanded by 0.8% m/m, reflecting a partial rebound from the 1.7% monthly decline in the previous month. However, in the three months to August, output shrank by 2.0%, signalling a possible negative contribution to GDP growth from the mining sector. This is consistent with our view that the economy may have failed to sustain the 0.6% quarterly GDP growth recorded in 2Q23.
Overall, the mining sector remains challenged by unreliable energy supply and logistics constraints, as well as moderating external demand, with growth challenges in China and Europe boding ill for the export of critical commodities. World merchandise trade has underperformed YTD, and global institutions have subsequently lowered their trade outlook, citing weak global demand and rising trade barriers.
Manufacturing output expanded by 1.6% y/y in August, reflecting a moderation from 2.2% y/y (previously 2.3% y/y) growth in July. Seasonally adjusted output expanded by 0.5% m/m, not enough to reverse the 1.7% monthly decline in July. The monthly rebound, though partial, is consistent with the PMI business activity, which recovered to 50 index points during the reference month from 38.1 in July. Nevertheless, the business activity relapsed in September to 41.9, signalling a possible monthly decline in manufacturing output. In the three months to August, output shrank by 0.4%, consistent with our view of a quarterly GDP growth moderation in the third quarter.
Although the latest PMI reading points to weaker activity at the end of the third quarter, manufacturers were optimistic about near-term operating business conditions. Beyond this year, lower levels of load-shedding and a modest recovery in demand should underpin growth in the sector. We are, however, still concerned about the logistics challenges, which, combined with load-shedding, have been a binding constraint on economic activity.
Week ahead
On Wednesday, data on consumer inflation for September will be published. Consumer inflation edged up to 4.8% y/y in August, from 4.7% in July, and recorded monthly pressure of 0.3% driven by core inflation. Core inflation was also 4.8% y/y and 0.3% m/m, reflecting the impact of additional municipal tariff increases following the July survey. Electricity inflation lifted to 15.1% y/y and fuel inflation was -11.7% y/y. Food and non-alcoholic beverages continued softening to 8.0%, from 9.9% previously. We anticipate headline inflation to continue rising in September, by 0.8% m/m and to 5.5% y/y, given the persistence in fuel price hikes, while also reflecting the broader impact of an undervalued exchange rate. Restricting the full passthrough of these cost pressures will be slower consumer spending amid tightened monetary policy and real wage compression. Overall, headline inflation should average around 6% this year, with the disinflation trend over the near term showing some volatility.
Also on Wednesday, retail sales data for August will be released. In July, volumes extended annual weakness, declining by 1.8%, marking seven successive months of decline this year. Seasonally adjusted sales were flat (0.0% m/m), following muted growth of 0.3% m/m in June. YTD (January to July) retail sales volumes are down by 2.1% y/y compared to the corresponding period last year. The weak performance in retail sales is consistent with the impact of higher-living cost pressures, with elevated inflation and higher interest rates weighing heavily on consumers' purchasing power.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 12 Oct | SA | Mining production % y/y | Aug | -2.5 | -4.4 |
| SA | Mining production % m/m | Aug | 0.8 | -1.7 | |
| SA | Manufacturing production % y/y | Aug | 1.6 | 2.2 | |
| SA | Manufacturing production % m/m | Aug | 0.5 | -1.7 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 18 Oct | SA | Headline CPI % y/y | Sep | -- | 4.8 |
| SA | Headline CPI % m/m | Sep | -- | 0.3 | |
| SA | Retail Sales % y/y | Aug | -- | -1.8 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 73,390.81 | 3.0% | -0.9% | 13.7% |
| USD/ZAR | 19.02 | -2.5% | 0.6% | 4.0% |
| EUR/ZAR | 20.00 | -2.8% | -1.6% | 12.7% |
| GBP/ZAR | 23.16 | -2.7% | -2.0% | 14.0% |
| Platinum US$/oz | 868.50 | 1.6% | -4.6% | -1.3% |
| Gold US$/oz | 1,868.65 | 2.7% | -2.3% | 11.7% |
| Brent US$/oz | 86.00 | 2.3% | -6.6% | -7.0% |
| SA 10 year bond yield | 10.67 | -3.0% | 2.6% | -1.5% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f |
|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.7 | 1.1 | 1.7 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 1.1 | 1.3 | 1.2 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 5.3 | 3.3 | 4.3 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.2 | 4.8 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.4 | 4.5 | 4.9 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 7.50 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.00 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.10 | 17.50 |
