By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
The domestic automotive industry, a cornerstone of the South African economy, accounts for an estimated 5.3% of GDP, with 3.2% coming from manufacturing and 2.1% from retail. The manufacturing segment alone employs approximately 125 222 workers, and when considering the entire value chain, the industry supports over 400 000 jobs. The automotive sales and production landscape is a crucial indicator of economic health. However, the industry has recently faced challenges due to energy constraints and weakened demand arising from the cost-of-living crisis. In this report, we provide insights into the industry's trends.
Diverging performance between new and used car sales
Despite a modest 1.5% y/y increase in total new vehicle sales in July, overall volumes have been under pressure, showing a year-on-year decline since August 2023 due to weak demand fundamentals. Year-to-date (YTD) performance indicates that total sales volumes are down by 6.2%, with new passenger vehicles declining by 5.0% and new commercial vehicles by 8.4%. While the YTD decline in commercial vehicles may reflect a correction following robust growth last year, the weakness in passenger vehicles underscores significantly weak consumer fundamentals. The rise in interest rates-from a low of 3.50% at the peak of the pandemic to 8.25% currently-has materially impacted consumer balance sheets and affordability. Additionally, vehicle pricing, influenced by factors such as the rand exchange rate's performance, has further eroded consumer affordability for new vehicles. As a result, consumers are either holding onto their vehicles for longer, delaying the replacement cycle, or increasingly participating in the used-vehicle market.
Used car market cycle remains supported
To gain insights into the used-car market, we rely on two key datasets. Firstly, the Stats SA data on the real value of motor trade sales, a proxy for revenue, reveals some interesting developments. In 1H24, real motor trade sales for used cars increased by 3.0%, while those for new vehicle sales declined by 9.7%. The second dataset, from the National Traffic Information System (NATIS), provides insight into registered used and new vehicles. Reflecting increased participation in the used-car market, the data shows that registrations of used vehicles rose by 4.8% in 1H24 compared to the corresponding period last year, while registrations of new vehicles declined by 5.6% over the same period. While used vehicles are generally more expensive than before the pandemic, the notable moderation in inflation1 should assist in underpinning consumer preference for used vehicles.
Production and external trade trends
In response to weak demand and a normalisation from the robust growth experienced post-pandemic, domestic motor vehicle production has experienced a modest decline, falling by 3.0% YTD. Other automotive segments are also under pressure, with the production of bodies for motor vehicles, trailers, and semi-trailers down by 9.1%, and the production of parts and accessories sharply declining by 17.8%. The external trade balance data further reflects this general weakness in the domestic automotive sector, with the nominal rand value of imported vehicles, aircraft, vessels, and associated transport equipment down by 23.3% in 1H24, compared to a significant increase of 39.0% in 1H23.
Overall, while the domestic automotive sector is experiencing cyclical weakness, particularly due to weak demand, part of this downturn can be attributed to a correction following the
solid post-pandemic performance. Cost-of-living pressures, including rising vehicle prices, have slightly benefitted the used car market as consumers try to avoid the premium in new vehicle prices.
However, an impending interest rate cutting cycle, a more stable rand exchange rate, and expected improvements in household disposable income should provide some support to the automotive sector moving forward.
1 Used-vehicle price inflation peaked at 16.0% y/y in December 2022 and was at 3.0% in June 2024. New vehicle price inflation was 5.2% in June 2024
Week in review
Total mining production, not seasonally adjusted, contracted by 3.5% y/y in June, following an upwardly revised 1.3% increase (previously 0%) in May. Seasonally adjusted output declined by 1.6% m/m, following a subdued 0.1% increase in May. Overall, mining output fell by 0.9% in 2Q24, after a 1.3% decline in 1Q24, confirming that the sector dragged on GDP growth in the reference quarter. This partially clouds our expectation of a GDP rebound in 2Q, following the unexpected decline in 1Q. However, given the smaller contribution of the mining sector to GDP compared to the manufacturing sector, our outlook remains intact at this stage.
The Quarterly Labour Force Survey (QLFS), a household-based employment survey (not seasonally adjusted), revealed a decline in employment during 2Q24 by 92 416 q/q, completely reversing the 21 555 jobs gained in 1Q24. Unemployment increased by 157 936 q/q, bringing the total number of unemployed individuals to 8 383 824. Meanwhile, the total labour force grew by 65 520. This growth was slower than the rise in unemployment, resulting in an increase in the unemployment rate from 32.9% in the previous quarter, to 33.5%. The quarterly increase in unemployment was primarily driven by a rise in those losing their jobs and those classified under the "other" category. In contrast, new entrants and re-entrants to the labour market declined by 3 167 and 31 035, respectively.
While seasonal variations may obscure the underlying movements in the data, year-on-year comparisons provide clearer insights into labour market developments. Compared to 2Q23, employment increased by 306 140, reflecting 2.6% year-to-date (YTD) growth from January to June, compared to the same period last year.
Retail sales continued their upward trajectory in June, surging to 4.1% y/y, from 1.1% in May (revised from 0.8%). On a month-on-month basis, volumes rebounded by 1.6% from the 0.2% decline in May (revised up from 0.7%). This outcome means that volume sales rebounded from -0.3 q/q in 1Q, to 1.5% q/q in 2Q, implying that the retail industry will contribute positively to 2Q24 GDP growth.
Week ahead
On Tuesday, the leading business cycle indicator for June will be published. The leading indicator fell to 111.9 index points in May, from 113.0 in April. While this was a 1.0% m/m decrease, the indicator remained 2.0% higher than a year ago. Seven out of the ten constituent variables decreased, with the largest negative contributions from a decline in residential building plans approved and slower trend growth in job advertisement space. Nevertheless, we could see improvement in this indicator going forward as stable energy supply and easing political uncertainty support confidence and activity.
On Wednesday, data on consumer inflation for July will be released. Headline inflation was 5.1% y/y in June, down slightly from 5.2% in May, with monthly pressure of 0.1%. Core inflation slowed to 4.5% y/y, from 4.6% previously, but had monthly pressure of 0.4%. Average fuel prices fell by 4.6% m/m but were up by 7.6% y/y, down from 9.3% previously. Food and non-alcoholic beverages inflation was 4.6% y/y, a slight decrease from 4.7% previously, but monthly pressure lifted to 0.5%. Monthly headline inflation should lift to 0.6% in July, due to utility cost increases and intensifying food price pressures. Nevertheless, fuel deflation, following the R1 per litre reduction in petrol prices, should once again mitigate these pressures. Despite higher monthly inflation, we predict that headline inflation will ease to 4.8% y/y. On average, headline inflation should be 4.9% in 2024, supported by slowing global inflation, stable oil prices, a less depreciated rand, and subdued domestic demand. However, upside risks are material and the road ahead should still be bumpy.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 13 Aug | SA | Mining production %m/m | Jun | -1.6 | 0.1 |
| SA | Mining production %y/y | Jun | -3.5 | 1.3 | |
| SA | Unemployment rate % | 2Q24 | 33.5 | 32.9 | |
| 14 Aug | SA | Retail sales %m/m | Jun | 1.6 | -0.2 |
| SA | Retail sales %y/y | Jun | 4.1 | 1.1 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 20 Aug | SA | Leading economic indicator | Jun | -- | 111.9 |
| 21 Aug | SA | CPI % m/m | July | -- | 0.10 |
| SA | CPI % y/y | July | -- | 5.1 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 82,226.43 | 1.8% | 0.1% | 8.8% |
| USD/ZAR | 18.02 | -1.8% | -1.0% | -5.9% |
| EUR/ZAR | 19.77 | -1.5%/td> | -0.4% | -5.3% |
| GBP/ZAR | 23.15 | -1.1% | -1.9% | -4.9% |
| Platinum US$/oz. | 956.30 | 2.1% | -4.3% | 7.1% |
| Gold US$/oz. | 2,456.79 | 1.2% | 1.4% | 29.2% |
| Brent US$/oz. | 81.04 | 2.4% | -4.5% | -4.5% |
| SA 10 year bond yield | 9.95 | -2.1% | -3.2% | -10.7% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 5.0 | 1.9 | 0.7 | 0.9 | 1.7 | 1.8 |
| Household consumption expenditure % y/y | 6.2 | 2.5 | 0.7 | 0.8 | 1.8 | 1.8 |
| Gross fixed capital formation % y/y | -0.4 | 4.8 | 3.9 | 1.2 | 4.8 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 4.9 | 4.4 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.5 | 4.4 | 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 | 18.40 | 17.60 | 18.30 |
