By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
A colossal task awaits the seventh administration
Headline producer and consumer inflation tend to receive the most attention as indicators of inflationary pressures in the economy. Understandably so given that changes in a measure like the Consumer Price Index (CPI) is the focus of the South African Reserve Bank (SARB) in fulfilling its inflation-targeting mandate. However, indications of inflationary pressures across the economy vary and below we include a few to arrive at a broader view of price pressures in South Africa (SA).
Starting with the focal point. Headline consumer inflation recorded an average of 3.3% in 2020, the lowest since 2004, before post-lockdown supply-demand imbalances and geopolitical tensions drove inflation to 6.9% in 2022. Following a peak of 7.8% in July 2022, base-effects supported inflation as low as 4.7% in July 2023, but it has since stabilised above 5% - settling at 5.2% in April and May of this year. The impact of restrictive monetary policy has been key, limiting the lift in underlying (core) pressures which peaked at 5.3% in April 2023. Another supportive development in core inflation was that average core goods inflation was faster than services inflation. Core goods inflation reflected global developments more immediately, while firms delayed the passthrough to services. Had these measures lifted in tandem, headline inflation would have been more pronounced and interest rates more cumbersome.
Generally, weaker passthrough during the 2022 price shock was also evident in Producer Price Index (PPI) dynamics where price pressures on goods were not fully reflected in consumer goods. During that year, producer inflation peaked at 18.0% in July, with a proxy for consumer-related PPI peaking at 16.9%, each at least five percentage points above the peak in CPI goods inflation. On average, producer inflation was 14.3%, with consumer-related PPI averaging 12.9%, whereas CPI goods inflation was 9.8%. While our analysis reflects a one-way causality from producer inflation, with the passthrough occurring within one to three months, the extent was limited. This implies that retailers experienced margin pressures, given weak consumer fundamentals as a cost-of-living crisis began amid depleting lockdown-related involuntary savings. Since April 2023, producer inflation has been running marginally below consumer goods inflation as retailers attempt to gradually claw back some of the losses observed in 2022. The latest producer inflation print for May was 4.6% y/y, reflecting a moderation from 5.1% in April. Excluding petroleum-related goods, producer inflation was 3.9% down from 4.5% over the same period. Meanwhile, consumer-related PPI was 4.3% and CPI goods recorded 5.7%. 1 Data is reported on a year-on-year basis unless it is stated otherwise.
The Unit Value Indices (UVI) are another proxy of price pressures, providing indications of how imported unit values are changing. These should filter through to producer and consumer costs. Indexing the unit values to the end of 2019 shows how imported cost pressures lifted markedly across consumer-related products in 2022, led by crude and refined products, food products, and recently joined by clothing and footwear. Although the UVIs for these items remained elevated in April, lower petroleum product prices and a less depreciated rand should support an easing going forward.
The 2Q24 Business Confidence Index survey results also suggest rising selling prices, albeit at a slowing pace in the latest reading. Lastly, the inflation expectations survey results for 1Q24 showed that average expectations were tame compared to the previous survey. Over the medium term, inflation was anticipated to average 5.3% versus 5.6% previously. Importantly, salary growth expectations (5.0%) were lower than inflation expectations - highlighting that passthrough pressures were weak. We expect the 2Q24 survey results next Friday, and slower headline inflation likely supported lower expectations.
Overall, this data points to inflation being faster than the central bank prefers. However, pressures are subsiding, and a less depreciated rand as well as easing structural constraints such as load-shedding, should be supportive of slower inflation. We currently project inflation to slow towards 4.5% before year-end and more sustainably over the medium term. 2 The survey is published by the BER and covers business, trade unions and analysts.
Week in review
The leading business cycle indicator recorded 113.0 index points in April, a 2.4% m/m and 1.8% y/y increase. This reflected broad-based improvement as eight out of the ten constituent variables increased. The most positive contributions were from accelerated growth in the trend of job advertisement space as well as more building plans approved. Meanwhile, weak activity in the manufacturing sector detracted from the index. This is the first positive annual reading in two years and could be an early indication of improving economic outcomes - should political headwinds subside, and reforms continue to progress.
Employment in the formal non-agricultural sectors of the economy, as reflected in the Quarterly Employment Survey, contracted by over 60 000 jobs or -0.6% q/q in 1Q24. Many of the jobs shed were in trade and it was more than just post-festive layoffs of part-time workers. Compared to 1Q23, 70 000 jobs (0.6%) have been lost but over 400 000 jobs have been added since 1Q19. The latest estimates reflect 10.7 million workers in the formal economy. Total gross earnings declined by 3.5% q/q but were 4.8% higher than in 1Q23. Notably, earnings were 36.8% higher than 1Q19 levels, beating inflation of 28.4%. South Africa's political landscape remains uncertain, but joblessness should be top of mind as the seventh administration is formalised. Continued progress in structural reform and improved local growth over the medium term is paramount to employment creation. Furthermore, as inflation subsides over the next year, profitability and spending power should improve. Ultimately, after two years of cost-of-living pressures, jobs and income would be the most meaningful relief to households.
The FNB/BER Civil Confidence Index fell to 44 index points in 2Q24, from a near eight-year peak of 47 points in 1Q24. This highlighted slowing activity in the sector as well as uncertainty ahead of the elections. Nevertheless, confidence was still above the sample average of 41 points (since 1997) and activity is expected to improve going forward. This will be further supported by reduced political uncertainty and demand related to energy and other infrastructure projects.
The FNB/BER Consumer Confidence Index (CCI) continued to improve in 2Q24. The CCI lifted to -12 index points in 2Q24, after improving to -15 points in 1Q24 from -17 points in 4Q23. This was the highest reading in 18 months, reflecting load-shedding reprieve and lower cost-of-living pressures. While the survey was conducted after the national elections, it was before the proposed GNU and was likely still hindered by political uncertainty to some degree. In line with this, lower-income consumers, who are more sensitive to cost pressures, had improved confidence. Meanwhile, higher-income earners, who are more sensitive to structural and policy issues, showed no improvement in sentiment. Ultimately, the reading still suggests broad pessimism, highlighting that while consumers perceive their financial outlook as more positive, they remain concerned about the overall performance of the economy which will hinder their willingness to purchase durable goods.
Private Sector Credit Extension (PSCE) increased by 4.3% y/y in May, faster than the 3.9% increase in April. However, the outturn fell short of Reuters' consensus prediction of a 4.7% expansion. The acceleration in PSCE was largely driven by corporate credit, which expanded by 5.0%, up from 4.3% in April. Within corporate credit, vehicle asset finance was the fastest-growing credit line, expanding by 11.7% y/y, though this reflects a sustained moderation from the 16.6% peak in August 2023. General loans and advances expanded by 7.1% y/y, indicating an acceleration from the 3.1% increase in April. Mortgage advances grew by 3.2%, slightly slower than the 3.4% increase in April.
Meanwhile, household credit growth remained steady at 3.4% y/y in May, unchanged from the previous month's figure. This is the slowest pace of increase since March 2021 when household credit growth was 3.3% y/y, highlighting the impact of tighter monetary policy. Detailed data indicates that household general loans and advances contracted by 0.7% y/y, following a 0.2% y/y contraction in April. Growth in mortgage advances remained subdued yet steady at 2.8%, while instalment sales credit growth was 6.2%, down slightly from 6.3% in April.
Week ahead
On Monday, the Absa manufacturing PMI for June will be published. The PMI relapsed to below the neutral 50-mark in May, registering 43.8 points from 54 in April. A key reason for the decline appears to be a sharp fall in customer demand, driven by delayed placing of orders as customers were waiting to see the outcome of the election. As such, new sales orders declined to 37.8 points in May from 55.6 points in April, and the business activity index declined to 38.1 from 57.2 points. Positively, the index for expected business conditions in six months' time increased to 57.6 from 55.7 in April, likely fuelled by hopes for a favourable election outcome and a return of "put-on-hold" orders, as well as the more upbeat expectations of a global economic recovery, particularly in Europe. That said, it is telling that the PMI has been in negative territory for most of this year, suggesting an unstable manufacturing sector during this election year.
Also on Monday, data on new vehicle sales for June will be released. New vehicle sales fell by 6 137 units or 14.2% y/y to 37 105 units in May. This suggests that the uptick that was recorded in April was temporary. Passenger car sales registered a decrease of 11.7% y/y, light commercial vehicles fell by 19.5% y/y, medium commercial vehicles by 7.3% y/y, while heavy trucks and busses posted -17.1% y/y. Cost-of-living pressures coupled with political uncertainty are likely to keep activity in the new vehicle market subdued. Once these unwind and the investment climate improves, broader sentiment and purchases of big-ticket items should recover.
On Thursday, data on electricity generated and available for distribution for May will be released. Electricity production (not seasonally adjusted) lifted by 5.7% y/y in April after stagnating at 0.0% previously. On a seasonally adjusted basis, electricity production increased by 1.2% m/m after falling by 0.1% in March. Consumption increased by 6.2% y/y, from -0.7% previously, and monthly momentum of 1.8% was recorded, versus -0.7% in March. The lift in the Energy Availability Factor, and the related suspension of load-shedding over the past three months, should support improvement in the sector's outcomes in 2Q24. While near-term risk from rising demand at the depth of winter remains, we are optimistic that more private sector capacity coming online over the medium term will result in the sector being more consistently supportive of economic growth.
On Friday, data on South Africa's foreign exchange reserves for June will be released. Gross reserves amounted to $62.1 billion in May, an increase from $61.8 billion in April. Gold reserves increased by $129 million to $9.4 billion, supported by a higher gold price. Foreign exchange reserves (including Special Drawing Rights holdings) increased by $163 million to $58.6 billion. These increases were partially offset by the foreign exchange payments made on behalf of the government.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 25 Jun | SA | Leading Business Cycle Indicator | Apr | 113.0 | 110.4 |
| SA | Quarterly Employment Statistics % q/q | 1Q24 | -0.6 | -1.5 | |
| 26 Jun | SA | FNB/BER Civil Confidence Index | 2Q24 | 44 | 47 |
| 27 Jun | SA | FNB/BER Consumer Confidence Index | 2Q24 | -12 | -15 |
| SA | Producer Price Inflation % y/y | May | 4.6 | 5.1 | |
| 28 Jun | SA | Private Sector Credit Extension % y/y | May | 4.3 | 3.9 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 1 Jul | SA | Absa manufacturing PMI | Jun | -- | 43.8 |
| SA | NAAMSA new vehicle sales % y/y | Jun | -- | -14.2 | |
| 4 Jul | SA | Electricity production % y/y | May | -- | 5.7 |
| 5 Jul | SA | Gross foreign reserves $ bn | Jun | -- | 62.1 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 78,969.33 | -1.4% | 0.1% | 5.9% |
| USD/ZAR | 18.47 | 2.8% | 0.6% | -0.3% |
| EUR/ZAR | 19.78 | 2.8% | -0.8% | -2.6% |
| GBP/ZAR | 23.35 | 2.6% | -0.4% | -1.1% |
| Platinum US$/oz. | 990.59 | 0.6% | -6.3% | 6.9% |
| Gold US$/oz. | 2,327.73 | -1.4% | -1.0% | 21.6% |
| Brent US$/oz. | 86.39 | 0.8% | 4.0% | 19.6% |
| SA 10 year bond yield | 10.83 | 2.4% | -4.9% | -2.8% |
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 | 5.0 | 4.7 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.6 | 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 |
