By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
No surprises at the first MPC meeting of the year
As expected, the Monetary Policy Committee (MPC) left interest rates unchanged at their first meeting in 2024. This was a unanimous decision, providing further credence to the view that the cycle has turned, and we have reached a peak in interest rates. Besides starting point changes, the MPC broadly left forecasts unchanged. Arguably, the only news from this MPC was the new member and hopes of further additions. This should allay market concerns around a tied vote and the Governor having to exercise his prerogative in that instance. We are more concerned with when the “hold” becomes a “cut” and this turning point will be a very difficult call. We also discussed this in our previous report.
The MPC left expectations of trading partner growth unchanged at 2.6%, still reflecting a further slowing in growth this year, which mirrors expectations for the broader globe. This should weigh on South Africa's (SA) external trade, compounding weaker consumer spending. As is, growth for 2023 has been revised lower to 0.6%, from 0.8%, after incorporating the contraction in 3Q23. Further improvements in electricity supply are expected over the longer-term, lifting potential growth. However, over the forecast period, the lower starting point on growth dictates that the output gap is revised slightly lower yet remains broadly closed. Despite the continued logistical issues, risks to growth are considered balanced.
The other impact of logistical issues is on prices. While local rail issues have forced more goods to be transported by road, the conflict in the Middle East and the Panama Canal drought conditions have created renewed global shipping pressures that may be slowly showing up in intermediate producer inflation. Imported inflation will also be driven by sticky global inflation and an undervalued rand. However, unlike persistently strong wage growth in advanced markets, local average salary growth was weaker than expected in the latter part of last year. This, along with a negligible output gap, explains why core inflation has underwhelmed. Nevertheless, as real salaries improve, with food and fuel price pressures softening from the recent surge, the uptake of more discretionary items could usher in a normalisation in services inflation. We (FNB) already anticipate a post-pandemic surge in medical aid, financial services, and education fees in 1Q24, and if this was to be coupled with sticky core goods inflation (from imports and input cost pressures), it could prove devastating to the disinflation trend. As expected, the MPC has once again flagged upside risk to inflation.
A negative current account and fiscal balance, alongside rising global real interest rates, supports the narrative of rising neutral interest rates. However, if the SARB's inflation forecast prevails, policy is likely to become more restrictive over the course of the year, surpassing the estimate on neutral by over one percentage point by 4Q24. Such conditions provide headroom for nominal interest rate cuts, but the extent will be dictated by shifts in G3 real interest rates, SA's fiscal performance and risk premium, as well as inflation expectations. The latter two indicators highlight other means of fighting inflation - prudent fiscal policy and anchored inflation expectations. There are others. Administered price inflation, electricity, and water for example, could also be better anchored, reducing input cost pressures. In addition, continued structural reform that allows for better service delivery and an opening up of local markets would be beneficial to competitive pricing. All the above suggests that debtors can look forward to some relief in 2H24 but the environment will be neutral, not accommodative.
Week in review
The leading indicator contracted by 0.4% m/m in November, after lifting by 0.5% m/m in October. As a result, the annual improvement portrayed over the past four months has stalled and the leading indicator has weakened to -3.8% y/y versus -3.5% y/y previously. Half of the constituent indicators contributed to the decline, led by the narrowing of the interest rate spread as well as the deceleration in the trend growth of job advertisement space. Overall, this reflects persistent economic weakness, which mirrors expectations at a global level.
Consumer inflation eased further in December, slowing to 5.1% from 5.5% in November. There was no monthly pressure as core inflation was mitigated by deflation in fuel and food and non-alcoholic beverages (NAB). Core items lifted by 0.2% m/m but remained steady at 4.5% y/y. Meanwhile, fuel prices contracted by 2.7% m/m and 2.5% y/y. Food and NAB prices fell by 0.1% m/m but remained elevated at 8.5% y/y. We expect headline inflation to lift in 1Q24, starting with 5.5% in January, primarily as periodical survey outcomes provide upward pressure to core inflation. Nevertheless, inflation should continue its deceleration trend over the course of the year, averaging around 5.2% from 6.0% in 2023.
Producer inflation slowed to 4.0% in December from 4.6% in November. Average producer prices deflated by 0.6% m/m, mainly driven by the fall in petroleum-related product prices, while transport equipment provided upward pressure. Food product inflation lifted slightly by 0.2% m/m but is still slower on an annual basis, at 4.7%. Intermediate producer prices also increased from November but remain 2.2% below end-2022 levels. On average over 2023, producer inflation was 6.7%, significantly lower than the 14.4% over 2022.
Week ahead
On Tuesday, data on private sector credit extension (PSCE) for December will be published. PSCE underwhelmed expectations in November and slowed to 3.8% from 3.9% in the previous month, as both corporate and household credit declined. From a corporate perspective, weakness was broad-based across credit types, except for instalment credit (predominantly vehicle asset finance), which has remained buoyant at around 14% YTD, underpinned by the ongoing investment into transport equipment. In the household sector, demand and utilisation of credit cards remains robust at around 9% YTD, while other components of credit are slowing alongside higher borrowing costs.
On Wednesday, the trade balance for December will be released. The trade balance amounted to a surplus of R21.02 billion in November, a lift from the R12.88 billion deficit in October. Export values increased by 9.2% m/m to R185.79 billion, while imports fell by 10.0% to R164.77 billion. The cumulative trade surplus amounted to R51.22 billion in November, still a significant compression from the R193.01 billion in the corresponding period in 2022.
On Thursday, the Absa manufacturing PMI data for January will be released. The PMI rose by 2.7 points to 50.9 index points, in part due to an improvement in business activity, as some factories benefitted from less load-shedding in December. Nevertheless, other subcomponents of the PMI continue to reflect weak demand conditions for manufactured goods. In addition, supply side factors, including the intensifying crisis at the ports threatens the sustainability of the improvement recorded in December, and could push production costs higher and restrict output heading into 2024.
Also on Thursday, data on new vehicle sales will be published. Volume sales declined for a fifth consecutive month in December, recording -3.3% y/y from a deeper 10.2% decline in November. Passenger car demand continued to slide, at -3.9% y/y, better than the 12.7% decline in November. On the commercial side, light and medium commercial vehicles declined by 2.9% and 24.2% y/y, while heavy and extra heavy vehicles increased by 10.8% and 15.5%, respectively. Overall, annual domestic vehicle sales increased by a meagre 0.5% compared to 2022, and crucially, remain 0.8% below 2019 pre- pandemic levels. According to NAAMSA, market activity in 2023 was restrained by the depressed economy, elevated cost of living and power outages. This impact was further compounded by major logistical challenges at the country's ports towards year-end.
Lastly, on Thursday, data on electricity generated and available for distribution for December will be published. In November, electricity production experienced a notable decline of 3.3% y/y, following a brief 1.6% y/y expansion in October, which interrupted a 24-month consecutive decline in production. On a seasonally adjusted basis, electricity production contracted by 2.7% m/m, partially reversing the 4.2% m/m growth recorded in October. Production is down by 5.2% on average compared to the same period last year and nearly 15% compared to 2007. This trend aligns with the sustained decrease in Eskom's generation capacity, attributed to ageing power plants and an increase in unplanned maintenance.
Year-to-date (January to September), new mortgage volumes have declined by 28%, according to the latest available Deeds registrar data. Measured from the most recent peak in 4Q20, market volumes are down by just over 40%, still better than the peak-to- trough decline of approximately 69% between 3Q07 and 1Q09 in the aftermath of the Global Financial Crisis (GFC). The decline has been more pronounced among younger buyers (Figure 1). In fact, the share of mortgage volumes attributed to individuals aged below 35 has declined from the most recent peak of 47.3% in 3Q20 to 39.7% in 3Q23. By contrast, the share of >35 has risen from 52.7% to 60.3% in the same period (Figure 2). This reflects the disproportionate impact of subdued economic activity and high interest rates on younger individuals, while stronger balance sheets often insulate older individuals.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 30 Jan | SA | Leading indicator | Nov | 111.8 | 112.0 |
| 24 Jan | SA | CPI % m/m | Dec | 0.0 | -0.1 |
| CPI % y/y | Dec | 5.1 | 5.5 | ||
| 25 Jan | SA | PPI % m/m | Dec | -0.6 | -0.6 |
| PPI % y/y | Dec | 4.0 | 4.6 | ||
| SARB Repo Rate Announcement | Jan | 8.25 | 8.25 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 30 Jan | SA | Private Sector Credit % y/y | Dec | 3.8 | |
| 31 Jan | SA | Trade Balance R billion | Dec | 21.0 | |
| 1 Feb | SA | Manufacturing PMI | Jan | 50.9 | |
| SA | New Vehicle Sales % y/y | Jan | -3.3 | ||
| SA | Electricity Production % y/y | Dec | -3.3 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 72,344.40 | -2.0% | -3.3% | -9.4% |
| USD/ZAR | 18.93 | 1.6% | 3.4% | 10.6% |
| EUR/ZAR | 20.59 | 0.7% | 2.4% | 11.4% |
| GBP/ZAR | 24.05 | 1.2% | 3.2% | 13.9% |
| Platinum US$/oz | 907.17 | -0.9% | -4.9% | -12.6% |
| Gold US$/oz | 2,022.67 | -0.3% | -0.9% | 6.2% |
| Brent US$/oz | 79.10 | 2.2% | -0.2% | -6.9% |
| SA 2030 bond yield | 9.80 | 0.8% | 0.7% | 1.5% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.8 | 1.2 | 1.6 | 1.8 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 1.1 | 1.3 | 1.3 | 1.4 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 5.3 | 3.2 | 4.4 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.2 | 4.8 | 4.7 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.7 | 4.9 | 4.6 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 7.50 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.00 | 10.50 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.10 | 17.50 | 18.40 |
