By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
After recording an average of 8.7% in 2022, global inflation fell to 6.8% in 2023 and is expected fall further to 5.9% this year. By 2026, it should settle slightly below the historical average of 3.8%.2 This trend is driven by declining inflation in advanced economies, which is expected to fall from 4.6% in 2023 to 2.6% in 2024, reaching the conventional 2% target by 2025. However, a different story applies to emerging markets where inflation is expected to remain steady at 8.3% in 2024 and slow in 2026 to 6.2%. Granted, emerging markets tend to have higher targets than advanced economies, however, the protracted reversion of inflation towards pre-pandemic levels, in many cases, highlights the vulnerability to price shocks. This vulnerability is further amplified by fiscal pressures and potentially higher neutral interest rates, which would suggest that interest rates need to be higher than initially thought to bring inflation down. That said, some central banks in emerging markets are cutting interest rates. Why not South Africa (SA)?
Emerging Asia generally experienced a milder peak in inflation relative to other emerging markets. This primarily reflected a less-disruptive shift from lockdowns and a slower lift in activity to pre-pandemic levels which allowed for better management of supply-demand imbalances. Also, the region experienced more stable currencies, which assisted in softening exchange rate passthrough. Eastern Europe had the opposite experience. Russia's invasion of Ukraine had widespread implications for currencies as well as food and energy prices, leading to double-digit interest rates in some countries. Those that have started a cutting cycle have reduced rates gradually, bar Moldova.
Latin America also experienced currency weakness and activity normalisation was supported by accommodative policy. What is interesting about this region is that monetary policy adjusted quickly, with countries like Brazil starting to lift rates in early 2021. To counter accommodative fiscal policy and rising inflation, Brazil raised its nominal policy rate from 2% in March 2021 to 13.75% by August 2022. This helped to guide inflation down from a peak of 12.1% to a low of 3.2% in mid-2023. Currently, inflation is around 4.5%, which is in line with the upper end of their inflation target tolerance band. With inflation projected to fall to the 3% target, inflation expectations anchored, and fiscal consolidation expected in the forecast period, the central bank started cutting rates in August 2023 and they now stand at 10.5%. Similarly, Chile started cutting rates in July 2023, with inflation falling from a peak of 14.1% to around 4% currently. Columbia's cutting cycle began end-2023 but has been more gradual, and rates are still elevated at 11.75%. While the central bank expects inflation to slow to the 3% target by 1H25, it is currently over 7%.
SA started hiking interest rates later than most of these countries and while a lower inflation peak assisted in containing the interest rate level, inflation has proven stickier as services inflation normalises. As it stands, the SARB predicts that inflation will only settle at target in 2026, with a higher probability of exceeding expectations. Furthermore, a volatile currency and loose fiscal policy have only compounded neutral interest rate pressures. If we assume that SA and countries such as Brazil, Mexico and Colombia keep rates at current levels and inflation falls to target within a year, all else being equal, the real interest rate earned from investing in the Latin American countries would be more competitive. In addition, even though these countries have started cutting rates, estimates are that policy is more restrictive than in SA, thereby driving inflation more forcefully towards target. All these factors suggest that SA may need to keep interest rates high for longer, taking advantage of falling inflation to raise real policy rates. Additionally, efforts to lower neutral interest rates are crucial. In other words, reduce the risk associated with SA assets through higher potential growth and, maybe, a lower inflation target? We get into this next week.
Week in review
Gross foreign exchange reserves amounted to $61.79 billion in April, a slight moderation from $62.32 billion in March. This reflected a $937 million decline in foreign exchange reserves due to valuation adjustments and foreign exchange payments made on behalf government, including a partial loan repayment of $501.2 million to the International Monetary Fund. On the other hand, the elevated gold price contributed to a $408 million rise in gold reserves, reaching $9.32 billion.
Total manufacturing production, not seasonally adjusted, declined sharply by 6.4% y/y in March, reflecting a material deterioration from the 4.0% y/y (previously 4.1% y/y) expansion in February, due, in part, to the Easter holiday falling in March this year versus April last year. The outcome was unexpected and below the Reuters consensus prediction of a 0.4% y/y increase. Seasonally adjusted output, which aligns with the official calculation of quarterly GDP growth, shrank by 2.2% m/m, consistent with the manufacturing PMI business activity index which fell to 44.5 points from 48.6 points between March and February. In the first quarter, manufacturing output declined by 1.0% q/q, after expanding by a muted 0.3% in 4Q23. This data confirms that the manufacturing sector dragged GDP growth during the first quarter this year. This is on top of the drag from the electricity sector, based on electricity production shrinking by 1.0% q/q. Such outcomes corroborate our view that the economy remains bound in a low growth regime amid ongoing infrastructure constraints and cyclical factors weighing on demand and appetite for spending.
Week ahead
On Tuesday, data on mining production for March will be released. In February, mining output saw a robust expansion, growing by 9.9% y/y after a decline of 2.8% in January. This was widespread, with eight out of twelve mining divisions experiencing increases. The largest surge, at 42.9% y/y, was recorded in the iron ore division, contributing 5.1 percentage points to overall mining output growth and a 14.6% y/y expansion in coal output. Seasonally adjusted total mining output increased by 5.0% m/m, more than reversing the 0.4% decline in January. The forthcoming March data will be critical in estimating the likely performance of the first-quarter GDP growth.
Also on Tuesday, the Quarterly Labour Force Survey (QLFS) for 1Q24 will be published. In 4Q23, the QLFS revealed that the official unemployment rate rose to 32.1% from 31.9% in 3Q23. This reflected a quarterly decline in employment of 21 587, bringing the total number of employed individuals to 16 723 195, meanwhile unemployment increased by 46 304 to reach 7 895 434. The largest decline in employment was observed in the community and social services sector, shedding 170 768 jobs. The primary sectors, construction sector, as well as wholesale and retail trade, motor trade, hotels, and restaurants, all experienced job losses in the fourth quarter.
On Wednesday, retail sales data for March will be released. In February, volumes fell by 0.8% y/y, from a decline of 2.0% in January. On a month-on-month basis, volumes rebounded by 0.4%, barely offsetting the 3.2% decline in January. Thus, volume sales in the last three months (Dec-Feb) are lower by 0.5% compared to the three months prior, implying that the retail industry is currently detracting from 1Q24 GDP growth.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 8 May | SA | Gross foreign exchange reserves $ Bn | Apr | 61.8 | 62.3 |
| 9 May | SA | Manufacturing Production % m/m | Mar | -2.2 | 4.0- |
| SA | Manufacturing Production % y/y | Mar | -6.4 | 4.0- |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 14 May | SA | Mining production % m/m | Mar | -- | 5.0 |
| SA | Mining production % y/y | Mar | -- | 9.9 | |
| SA | Official unemployment rate % | 1Q | -- | 32.1 | |
| 15 May | SA | Retail sales % m/m | Mar | -- | 0.4 |
| SA | Retail sales % m/m | Mar | -- | -0.8 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 77,539.15 | 2.0% | 2.7% | -0.3% |
| USD/ZAR | 18.49 | -0.3% | 0.1% | -2.0% |
| EUR/ZAR | 19.94 | 0.2% | -0.5% | -3.7% |
| GBP/ZAR | 23.13 | -0.5% | -1.2% | -2.9% |
| Platinum US$/oz. | 984.47 | 3.1% | 0.4% | -12.0% |
| Gold US$/oz. | 2,346.33 | 1.8% | -0.3% | 15.6% |
| Brent US$/oz.. | 83.88 | 0.3% | -6.2% | 9.8% |
| SA 10 year bond yield | 11.37 | -0.8% | 0.4% | 1.2% |
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 |
