By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
A lower inflation target for SA
There were no surprises when interest rates were left unchanged at the latest Monetary Policy Committee (MPC) meeting this week. In addition, forecast changes were mainly mark-to-market adjustments following the high-frequency data received since the March meeting. While near-term expectations continue to reflect a confluence of positive developments, such as reduced load-shedding, and sustained risks, e.g., geopolitical, improved macroeconomic outcomes are anticipated over the forecast period to 2026. The statement sounded much less hawkish than what we have become accustomed to over the past two years. Below we outline the most pertinent points from the meeting.
The MPC broadly kept the outlook on trading partner growth and inflation unchanged. Growth was adjusted only slightly higher to 2.7% this year (2.6% previously) and improves to 3.1% by 2026. This profile suggests improving fundamentals and that there is not much economic slack over the forecast period - as both potential and real growth improve. However, activity will likely be laggard relative to pre-pandemic times. Inflation in the G3 is expected to fall to 2.0% by 2026, supporting looser monetary policy, with average policy rates falling from 4.3% this year to 2.2% in 2026.
South Africa's outlook mirrors the above. GDP growth is projected to lift from 0.6% in 2023 to 1.6% in 2026, as structural constraints ease. In particular, the estimated load-shedding constraint should ease from 1.5ppts last year to 0.5ppts this year. Improving capacity also suggests that potential growth also rises from an estimated 0.1% to 1.6% over the same period, so the economy should neither be overheating nor underperforming. Therefore, limited inflation impetus should be generated from economic activity.
Furthermore, an improvement in the real value of the rand against a broad range of currencies, and relative to estimated fair value, should support slowing inflation. That said, the rand is likely to reflect volatility in the near term as the impact of election outcomes (locally and in major economies such as the US) and interest rate decisions (especially with anticipated delays in the US) filters through. In the outer years, broader risk sentiment as well as the performance of fiscal policy and the current account will have a bearing on the rand. Nevertheless, inflation should continue to slow as imbalances unwind and productivity improves. Inflation is now expected to stabilize at 4.5% from 2Q25, versus 4Q25 previously.
The risks to the outlook that the MPC continues to flag include heightened geopolitical tensions and how this could affect commodity prices and supply chains. Adverse weather conditions are also top of mind when considering soft commodity prices. Elevated administered price inflation is also flagged as a potential hinderance to containing inflation in SA. Ultimately, the MPC still views both growth and inflation risk as balanced. Before this meeting and since the hiking cycle began, upside inflation risk was the consistent view.
Broadly speaking, the feel of the statement was much less hawkish, but the MPC re-emphasised its pursuit to drive inflation to target. In line with this, monetary policy is expected to at best move to a neutral stance over the forecast, with real interest rates not far from the level consistent with a balanced economy - where inflation is at target and the output gap is closed. Given that such a reference level is higher than during the pre-pandemic era, the policy rate should also depict the same theme. The Quarterly Projection Model shows the repo rate at 7.3% by the end of 2026, the analyst consensus is 7%, and we predict 7.5% - all above the 6.5% at the end of 2019. This suggest between 75bps and 125bps worth of cuts, a shallow trajectory that means relief to indebted consumers will be marginal, and caution on short-term credit uptake may be warranted.
Week in review
Private sector credit extension (PSCE) growth slowed sharply in April, falling to 3.9% y/y from 5.2% previously. This undershot market expectations of 4.7%. Credit extended to the corporate sector slowed materially to 4.3% from 6.4% in March, primarily as the uptake of general loans slowed, which recorded 3.6% from 7.5%. Mortgages remained weak, edging up slightly to 3.4% from 3.3%, while vehicle finance remained relatively strong, slowing to 12% from 16.4% in March. Credit extended to the household sector slowed further to 3.4%, from 3.7% - the lowest growth rate since March 2021. This reflects tight credit conditions. Nevertheless, demand for consumption-oriented credit remained relatively robust as consumers struggle to make ends meet. Overdrafts increased to 3.2% from 2.5%, while credit card facilities remained robust at 9.5%. In the asset-backed class, the relative outperformance of car finance persists at 6.3%, down from 6.5%, while mortgages remain weak at 2.8%, down from 3.0%. 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 the 2H24.
Producer inflation rose to 5.1% y/y in April, up from 4.6% y/y in March, exceeding the Reuters consensus prediction of 5.0%. Monthly pressure was 0.5%, down from 1.1% previously. The annual increase in producer inflation was primarily driven by an 8.4% y/y rise in fuel prices and a 7.5% y/y increase in diesel prices. Excluding petroleum-related products, producer inflation measured 4.5%, a slight uptick from 4.4% in the prior month. Metal and equipment prices increased by 6.4%, following a 5.5% increase previously. Transport equipment prices rose by 4.4%, compared to a 3.5% increase in March. Food product prices increased by 2.8%, reflecting a moderation from the 3.6% rise in the prior month. We expect producer inflation to retreat in May, falling below 5.0%.
Week ahead
On Monday, the Absa manufacturing PMI data for May will be released. Following a dip below the neutral 50-point mark in March, the seasonally adjusted 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. 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 reflected a reasonable improvement in operating business conditions at the start to 2Q24.
Also on Monday, the Naamsa new vehicle sales data for May will be released. 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%. According to NAAMSA, activity was supported by a full month of no load-shedding. Nevertheless, new vehicle sales were down by 4.0% year-to-date, reflecting weak demand conditions.
On Tuesday, GDP data for 1Q24 will be released. After partially rebounding by 0.1% q/q in 4Q23, following a 0.2% decline in the prior quarter, GDP growth will likely be weak in the first quarter of 2024. We estimate a steady 0.1% quarterly growth, weaker than initially expected, supported by the anticipated rebound in the volatile agricultural sector's Gross Value Added and stable growth in the financial services sector. However, the risk of a GDP contraction is quite material, mainly due to the economic weakness observed in the goods-producing sectors, including freight transportation, during the reference quarter. Despite subdued growth in the first quarter, the second quarter could see a rebound, driven by the absence of load-shedding and the potential boost from election-related spending.
On Wednesday, the RMB/BER business confidence (BCI) survey results for 2Q24 will be published. The BCI notched even lower in 1Q24, reaching 30 index points from 31 points previously. Despite an improvement in the sentiment of new vehicle dealers at the start of this year, the deterioration in retailer and manufacturer confidence was material enough to result in lower overall confidence. This is while the confidence of wholesalers and building contractors remained broadly unchanged. Concerningly, business activity and investment intentions remained weak, with respondents highlighting structural constraints, crime, and political uncertainty as key impediments.
On Thursday, data on the current account for 1Q24 will be released. The current account deficit widened materially in 4Q23 to R165.5 billion from R34.4 billion in 3Q23. As a percentage of GDP, the current account deficit was 2.3%, compared to 0.5% previously. For 2023, the current account deficit widened to 1.6% of GDP versus 0.5% in 2022. This deterioration was driven by a smaller trade surplus on goods, which reflected a faster rise in import values relative to exports. Meanwhile the services, income, and current transfers balance worsened. Consensus expectations are for an even wider current account deficit over the forecast period. The SARB projects the current account deficit to widen further to -3.1% by 2026.
Also on Thursday, data on electricity generated and available for distribution for April will be published. 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. Going into 2Q24, this drag should reverse.
On Friday, data on foreign exchange reserves for May will be published. 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.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 30 May | SA | PPI % m/m | Apr | 0.5 | 1.1 |
| SA | PPI % y/y | Apr | 5.1 | 4.6 | |
| SA | Repo Rate % | May | 8.25 | 8.25 | |
| 31 May | SA | Private Sector Credit % y/y | Apr | 3.9 | 5.2 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 3 Jun | SA | Manufacturing PMI | May | -- | 54.0 |
| SA | Naamsa new vehicle sales % y/y | May | -- | 2.2 | |
| 4 Jun | SA | GDP % y/y | 1Q | 0.7 | 1.2 |
| SA | GDP seasonally adjusted % q/q | 1Q | -- | 0.2 | |
| 5 Jun | SA | BER Business confidence | 2Q | -- | 30.0 |
| 6 Jun | SA | Current account balance R billion | 1Q | -- | -165.5 |
| SA | Current account % of GDP | 1Q | -- | -2.3 | |
| SA | Electricity production % y/y | Apr | -- | 0.0 | |
| SA | Gross foreign reserves $ billion | May | -- | 61.8 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 77,161.71 | -2.3% | 1.4% | 2.8% |
| USD/ZAR | 18.76 | 1.5% | -0.1% | -4.9% |
| EUR/ZAR | 20.32 | 1.7% | -1.4% | -3.7% |
| GBP/ZAR | 23.88 | 1.8% | -1.8% | -2.7% |
| Platinum US$/oz. | 1,029.36 | 0.9% | 9.8% | 3.1% |
| Gold US$/oz. | 2,343.07 | 0.6% | 2.5% | 19.4% |
| Brent US$/oz. | 81.86 | 0.6% | -6.8% | 12.7% |
| SA 10 year bond yield | 11.39 | 1.4% | -1.2% | -4.4% |
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 | 1.4 | 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 | 5.1 | 4.7 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.7 | 4.7 | 4.7 |
| 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 | 18.40 | 17.70 | 18.30 |
