By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
A colossal task awaits the seventh administration
The post-election democratic processes have progressed smoothly, highlighted by this week's historic event where Cyril Ramaphosa was inaugurated as President of the seventh administration. Financial markets reacted positively to the proposed Government of National Unity (GNU), with the rand/US dollar exchange rate dipping below R18. Despite its traditional volatility, the rand has made strides that suggest that the political risk premium has subsided.
The President's forthcoming announcement of his Cabinet is now of paramount importance. Particularly for the critical ministries - Finance, Public Enterprises, Trade, Industry and Competition, Agriculture, Land Reform and Rural Development, and International Relations and Cooperation. This announcement will provide further insight into the economic direction and priorities of the seventh administration under the proposed GNU. It will also offer a window into the measures taken to strengthen confidence in the state through the political heads of these various departments.
While the previous administration made meaningful, yet incremental, progress in executing key reforms in energy, transport logistics, water, digital communications, and visas, the seventh administration faces the significant task of not just accelerating reforms but doing it in a way that promotes sustainable and inclusive growth as well as job creation.
Two critical indicators discussed below underscore a strong case for accelerating pro-growth reforms:
1. Unemployment
South Africa's official unemployment rate remains structurally high by global standards. Currently at 32.9%, the unemployment rate has increased from below 20% in the early 1990s. The youth (ages 15-24) face particularly tough economic and labour market conditions, with their unemployment rate estimated to be around 59.7% and those aged 25-34 experiencing an unemployment rate of 40.7%. South Africa's working-age population is estimated to be around 41 million, yet employment is only about 40% of this figure. This paints a dire situation that needs urgent attention.
2. Inequality
Levels of inequality remain astonishingly high and disappointing. Measured by the Gini coefficient, South Africa's income inequality is estimated to be between 0.63 to 0.67, significantly higher than its emerging market peers where the average Gini coefficient is below 0.5. This shows that, since the democratic transition in 1994, the structure of the South African economy is still characterised by unsustainably vast income inequalities. The decline in GDP per capita over the past decade is particularly worrying and underscores that the economic pie is not expanding enough to cater to the population.
Despite the government's efforts to reduce income inequality through progressive fiscal redistribution and other measures such as targeted social transfers, the elevated levels of inequality require concrete and sustainable interventions to boost long-term private sector fixed investment, economic growth, and job creation. Time is of the essence, and recent changes in the political landscape suggest that these socioeconomic ills are unsustainable and require urgent attention.
Week in review
Headline inflation steadied at 5.2% y/y in May, with moderate monthly pressure of 0.2%. Core inflation also remained flat at 4.6% y/y and had monthly pressure of 0.1%. Average fuel prices lifted by 0.6% m/m and were up by 9.3% y/y. Food and non-alcoholic beverages (NAB) inflation was also flat at 4.7% y/y, with monthly pressure of 0.2%. We should see headline inflation continue its plateau in June. Monthly pressure should remain subdued, as higher core inflation, supported by new data on housing price pressures, is mitigated by fuel deflation. Food pressures should intensify in 2H24 as the impact of adverse weather conditions and higher soft commodity prices reaches retail shelves. In addition, utility inflation should compound inflationary pressures. Nevertheless, slowing global inflation, range-bound oil prices, a less depreciated rand, and subdued domestic demand should support slowing inflation going into 2025. In line with this, headline inflation should average just above 5% this year, before slowing closer to the 4.5% midpoint over the remainder of the forecast period.
Retail sales grew by 0.6% y/y in April, down from 2.3% in March. The outcome exceeded expectations, with Reuters having predicted a slower 0.3% increase. Volume sales increased across five out of seven types of retailers, led by spending at Pharmacies (4.1% y/y) and Furniture shops (5.6%). On the opposite end, volumes declined among Food and beverages (-1.1%) as well as Hardware retailers (-1.7%). Seasonally adjusted sales also increased by 0.5%, down from 1.3% in March. This marks a decent start to Q2 and supports our view that growth will likely rebound in 2Q24. Nevertheless, consumer spending should remain relatively subdued given the persistently high costs of living and low consumer sentiment.
Week ahead
On Tuesday, the leading business cycle indicator for April will be published. The leading business cycle indicator measured 110.4 points in March, reflecting a 1.9% m/m and 1.3% y/y decline. This was due to declines in five out of seven constituent variables, with the largest negative contributions from the number of building plans approved and the trend growth in the number of new passenger cars sold. The indicator was down 1.3% y/y, marking the twenty-fourth consecutive month of annual decline. This trend is consistent with the weakness and incomplete recovery in the goods-producing sectors.
Also on Tuesday, the Quar terly Employment Statistics for 1Q24 will be released. Employment in the formal non-agricultural sectors of the economy contracted by 194 000 jobs or -1.8% q/q in 4Q23. Many of the jobs shed were in community services, in line with phase four of the Presidential Youth Employment Initiative (PYEI) having ended in 3Q23. Nevertheless, 98 000 jobs (0.9%) have been added since 4Q22 and, given an updated sample, the recovery in employment is now complete, with employment higher by over 400 000 or 3.9% compared to 4Q19. Total gross earnings increased by 5.8% q/q and are 4.4% higher than in 4Q22. In addition, earnings have firmly surpassed 4Q19 levels by 25.9%.
On Wednesday, the FNB/BER Civil Confidence Index for 2Q24 will be published. Civil confidence continued improving in 1Q24, lifting to a near eight-year peak of 47 index points, from 41 points previously. This highlighted more contracts and profitability in the sector. Furthermore, survey respondents expected further improvement in 2Q24, but this may have been affected by political uncertainty ahead of the elections and how this uncertainty delayed demand.
On Thursday, the FNB/BER Consumer Confidence Index (CCI) for 2Q24 will be published. The CCI improved to -15 in 1Q24. This is after slipping to -17 index points, from-16 points, in 4Q23. Nevertheless, the reading still reflected consumer constraints given elevated living costs. The timing of the 2Q24 survey should reflect political uncertainty ahead of the elections, as have other confidence surveys, which will likely weigh on confidence and the willingness to make meaningful financial decisions. Going forward, the suspension of load-shedding and slowing inflation should support more optimism.
Also on Thursday, data on producer inflation for May will be released. Producer inflation rose to 5.1% y/y in April, up from 4.6% y/y in March. 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. We expect producer inflation to retreat in May, falling below 5.0%.
On Friday, data on Private Sector Credit Extension (PSCE) for May will be released. In April, PSCE growth slowed sharply to 3.9% y/y from 5.2% previously. This was on the back of a material slowdown in credit extended to the corporate sector. Credit extended to the household sector also slowed, reflecting tight credit conditions. Nevertheless, demand for consumption-oriented credit remained relatively robust as consumers struggle to make ends meet.
Also on Friday, data on the trade balance for May will be released. In April, the trade balance surplus amounted to R10.47 billion, reflecting an increase from an upwardly revised surplus of R9.16 billion (previously R7.27 billion) in March. Exports expanded by 4.4% m/m in April, reaching R169.53 billion. Meanwhile, imports increased by 3.8% m/m, reaching R159.06 billion. Year-to-date, the trade surplus has amounted to R26.62 billion, significantly higher than the R6.69 billion surplus recorded over the same period last year. The wider trade surplus at the start of the 2Q24 bodes well for the current account balance dynamics. This follows a better performance in which the current account deficit narrowed to 1.2% of GDP in 1Q24 compared to 2.3% in the 4Q23.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 19 Jun | SA | CPI % m/m | May | 0.2 | 0.3 |
| SA | CPI % y/y | May | 5.2 | 5.2 | |
| SA | Retail Sales % m/m | Apr | 0.5 | 1.3 | |
| SA | Retail Sales % y/y | Apr | 0.6 | 2.3 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 25 Jun | SA | Leading Business Cycle Indicator | Apr | -- | 110.4 |
| SA | Quarterly Employment Statistics % q/q | 1Q24 | -- | -1.8 | |
| 25 Jun | SA | FNB/BER Civil Confidence Index | 2Q24 | -- | 47 |
| 27 Jun | SA | FNB/BER Consumer Confidence Index | 2Q24 | -- | -1.5 |
| SA | Producer Price Inflation % y/y | May | -- | 5.1 | |
| 28 Jun | SA | Private Sector Credit Extension % y/y | May | -- | 3.9 |
| SA | Trade balance R bn | May | -- | 10.5 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 80,073.05 | 4.8% | 0.3% | 5.9% |
| USD/ZAR | 17.97 | -2.4% | -0.6% | -1.8% |
| EUR/ZAR | 19.22 | -2.8% | -2.0% | -4.4% |
| GBP/ZAR | 22.75 | -3.3% | -1.0% | -2.7% |
| Platinum US$/oz. | 978.17 | 3.3% | -6.5% | 3.9% |
| Gold US$/oz. | 2,359.63 | 2.5% | -2.6% | 22.1% |
| Brent US$/oz. | 85.71 | 3.6% | 3.4% | 11.1% |
| SA 10 year bond yield | 10.58 | -3.7% | -4.7% | -6.5% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022/Event | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 5.0 | 1.9 | 0.7 | 1.2 | 1.5 | 1.6 |
| Household consumption expenditure % y/y | 6.2 | 2.5 | 0.7 | 1.4 | 1.3 | 1.5 |
| Gross fixed capital formation % y/y | -0.4 | 4.8 | 3.9 | 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 |
