By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
While not robust, GDP growth in the 2Q24 was positive given the challenges faced by both consumers and businesses. With the right policies and easing constraints, this offers hope that boosting the country's growth potential remains feasible. However, cyclical weakness in demand persists, limiting the ability to significantly spur production increases, even though energy and, to some extent, logistics constraints have eased. In addition, poor service delivery at the municipality level, as well as deteriorated infrastructure continue to hinder economic performance. Considering this, a load-shedding-free environment will be crucial for a sustained recovery. Over time, as demand conditions improve, the productive sectors should respond with higher output. This outlook is embedded in our medium-term growth forecast.
This report focuses on the latest trends of the demand components of GDP, particularly household consumption expenditure and gross fixed capital formation (GFCF).
Household consumption
Although household consumption grew by 1.4% q/q and 0.9% y/y in 2Q24, real spending remains weak, with only a 0.3% year-to-date (YTD) increase compared to the same period last year. This is consistent with ongoing cost-of-living pressures and below-inflation wage growth in most sectors.
Breaking down household consumption by sector, spending on alcohol and tobacco fell by 2.3% YTD, followed by miscellaneous goods and services (-1.3%), clothing and footwear (-1.3%), and housing, water, electricity, gas, and other fuels (-1.3%). Transport spending also dipped slightly by 0.2%. These sectors, which combined account for 53% of total household spending, highlight the fragility of consumer demand.
On the positive side, spending in restaurants and hotels grew by 4.4% YTD. Furniture, household equipment, and maintenance saw a 2.2% rise, while communication spending increased by 2.1%. Education (+1.6%), health (+1.5%), food and beverages (+1.3%), and recreation and culture (+0.6%) also showed modest gains
Gross fixed capital formation
Weakening GFCF trends are concerning, particularly given the high unemployment levels in the country. GFCF declined by 1.4% q/q and a sharp 7.4% y/y in 2Q24, marking a four-quarter recession. YTD, GFCF is down by 5.0%, reflecting broad-based weakness across all investment categories except transfer costs.
The most significant weakness was in residential buildings, where investment fell by 11.9% YTD, consistent with the weak residential property market. Non-residential buildings also posted a sharp 9.4% decline, followed by construction works (-8.9%), transport equipment (-8.0%), and other assets, including research and development, software, mineral exploration, and biological resources, which dropped by 3.7%. Investment in machinery and other equipment was down marginally by 0.5%.
The sustained decline in GFCF underscores weak business confidence and a fragile economic recovery. GFCF remains about 11.5% below pre-pandemic 2Q19 levels and 19.7% lower than the post-global financial crisis peak of R815 billion in 4Q13, indicating a long path to full recovery.
Week in review
The manufacturing PMI retreated to contractionary territory in August, recording 43.6 index points from 52.4 points in July. The PMI has been in contractionary territory for 63% of the months until August, highlighting a challenging year for the manufacturing sector. Both business activity and new sales orders dropped, settling at 38.9 and 34.6 points, respectively. This could be a result of weaker domestic demand in August relative to July, but also highlights weak activity in Europe and China. Nevertheless, optimism on near-term conditions prevails and the prospect of lower purchasing prices, amid falling fuel prices, suggests that the operating environment will continue to improve. We remain concerned about supplier ability to manage rising demand given local logistical constrains.
After a temporary 1.7% y/y increase in July, new vehicle sales declined by 4.9% y/y to 43 588 units in August. This outturn reflected performance variations across segments. New passenger vehicle sales increased by 3.1% y/y to 30 022 units, supported in part by seasonally strong sales to the rental industry, which accounted for 16.7% of new passenger car sales, slightly down from 17.1% in July. In contrast, total commercial vehicle sales fell by 18.9% y/y to 13 566 units, marking the sixth consecutive month of decline. Within the commercial vehicle segment, light commercial vehicles dropped by 21.5% y/y to 10 709 units, while medium commercial vehicles rose by 8.1% y/y to 748 units. Heavy commercial vehicles also saw a decline of 11.4% y/y to 2 109 units. Year-to-date (January to August), total vehicle sales are down 6.0% compared to the same period last year, reflecting broad-based weakness across segments amid subdued confidence, weak economic performance, and high interest rates.
As expected, GDP data confirmed that the economy avoided a technical recession, expanding by 0.4% q/q, seasonally adjusted, in 2Q24. This followed an upward revision of 1Q24 data from a previously reported 0.1% contraction to zero growth. On a non-seasonally adjusted basis, GDP grew by 0.3% y/y, leading to a 0.4% expansion in the first half of 2024 compared to the same period in 2023. Growth in 2Q24 was broad-based, with seven out of ten sectors showing positive contributions. However, performance across GDP demand components was mixed: household and government spending rebounded, while fixed investment and exports declined. We maintain our forecast of 1.0% real GDP growth for 2024, rising to 1.8% in 2025 and 1.9% in 2026
The RMB/BER Business Confidence Index (BCI) continued to improve in 3Q24, rising from 35 index points in 2Q24 to 38. This is the first feel of the business mood following the formation of the Government of National Unity. While the index still reflects the impact of weak demand, it also suggests that conditions have improved, especially with the cessation of load-shedding, and businesses are more upbeat on the outlook. All sectors, except building contractors and wholesalers, recorded improved sentiment. However, even while slightly less optimistic, wholesalers remain the most upbeat sector. Lower inflation, impending interest rate cuts, and the two-pot retirement innovation should support consumption and address business concerns about demand. However, structural issues around crime and the state's inefficient delivery of services could remain an impediment on overall sentiment.
The current account deficit narrowed significantly again in 2Q24. It recorded R64.6 billion, from R106.9 billion in 1Q24 (revised up from R84.6 billion), and 0.9% of GDP, from 1.5% previously (revised from 1.2%). The improvement was supported by a wider trade surplus on goods, which increased from 2.3% of GDP to 2.6%. The lift in total export values reflected higher prices, while that in total import values was on account of both prices and volumes. The services, income, and transfer account deficit also narrowed, from R272. 7 billion to R252.1 billion and 3.8% of GDP to 3.4%. This was a result of a narrower primary income account deficit. South Africa's terms of trade also improved, highlighting the gains from range-bound oil prices and rising gold prices over 2Q24. Since then, oil prices have fallen, and gold prices remain resilient. This data suggests that the deterioration in the current account deficit that is anticipated for this year may be limited. However, logistical constraints remain a key hindrance to export growth and, alongside rising domestic demand, increases the odds of worse current account dynamics over the medium term.
As expected, growth in electricity production was sustained in July. Electricity production accelerated by 8.5% y/y, following a 5.4% expansion in June. Seasonally adjusted electricity production increased by 1.3% m/m, after rising by 2.4% in the previous month. Given the decline in unplanned breakdowns and an improvement in the energy availability factor, electricity production should continue to support GDP growth in 3Q24.
SA's gross foreign exchange reserves increased further, to $63.2 billion in August from $62.3 billion in July. Higher gold prices continue to support rising gold reserves. Valuation and asset price adjustments have also supported higher SDR holdings and foreign exchange reserves. These were marginally countered by foreign exchange payments made on behalf of government.
Week ahead
The week will kick-off with the release of the FNB/BER Building Confidence Index for 3Q24. In 2Q, confidence in the building value chain improved by eight points to 35, partly offsetting the 16-point plunge suffered in 1Q. The improvement was broad-based, with five out of the six sectors reporting higher confidence compared to the previous quarter. Underpinning the better business mood were signs of increased activity and sales across the building value chain. Production of building materials also improved, likely reflecting that manufacturing firms are taking advantage of the uninterrupted electricity supply to re-build their stock, and/or the anticipation of stronger demand post-elections.
On Tuesday, data on manufacturing production for July will be released. Total manufacturing production, not seasonally adjusted, fell sharply by 5.2% y/y in June, worse than the decline of 1.2% y/y in May. Seasonally adjusted output shrank by 0.5% m/m, better than the 3.6% monthly decline in the prior month. This was already reflected by the manufacturing PMI business activity, which remained in contractionary territory at 36.3 points during the same month. However, business activity and new sales orders surged into expansionary territory in July, and we could see a rebound in production.
On Thursday, the BER inflation expectations survey results for 3Q24 will be published. The 2Q24 survey showed a decline in anticipated inflation across the medium-term horizon. For 2024, the average expectation was revised downwards to 5.3%, down from 5.4% previously. Similarly, expectations for 2025 and 2026 were lowered to 5.0% and 4.9%, from 5.3% and 5.2%, respectively. Five-year-ahead expectations fell to 4.9% from 5.1%. While expectations at around 5% on average remain above the MPC's preferred 4.5% target, salary growth expectations of 4.9% on average suggest that compensation will barely keep up with inflation and passthrough should be limited. The survey covers businesses, trade unions, and analysts.
Also on Thursday, data on mining production for July will be released. Total mining production, not seasonally adjusted, contracted by 3.5% y/y in June, following a 1.3% increase in May. Seasonally adjusted output declined by 1.6% m/m, following a subdued 0.1% increase in May.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 2 Sep | SA | Absa Manufacturing PMI | Aug | 43.6 | 52.4 |
| 2 Sep | SA | Naamsa Vehicle Sales % y/y | Aug | -4.9 | 1.7 |
| 3 Sep | SA | GDP s.a. % q/q | 2Q24 | 0.4 | 0.0 |
| 3 Sep | SA | GDP % y/y | 2Q24 | 0.3 | 0.5 |
| 4 Sep | SA | BER Business Confidence | 3Q24 | 38 | 35 |
| 5 Sep | SA | Current Account Balance R bn | 2Q24 | -64.6 | -106.9 |
| 5 Sep | SA | Current Account % of GDP | 2Q24 | -0.9 | -1.5 |
| 5 Sep | SA | Electricity Production % y/y | Jul | 8.5 | 5.4 |
| 6 Sep | SA | Foreign exchange reserves $ bn | Aug | 63.2 | 62 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 9 Sep | SA | FNB BER Building Confidence | 3Q24 | -- | 35 |
| 10 Sep | SA | BER inflation expectations | 3Q24 | -- | 5.0 |
| SA | Manufacturing Production % m/m | Jul | -- | -0.5 | |
| SA | Manufacturing Production % y/y | Jul | -- | -5.2 | |
| 12 Sep | SA | Mining Production % m/m | Jul | -- | -1.6 |
| SA | Mining Production % y/y | Jul | -- | -3.5 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 82,146.83 | -2.5% | 3.4% | 10.4% |
| USD/ZAR | 17.71 | -0.2% | -4.3% | -7.8% |
| EUR/ZAR | 19.67 | 0.1% | -2.5% | -4.4% |
| GBP/ZAR | 23.32 | 0.2% | -0.1% | -2.8% |
| Platinum US$/oz. | 924.20 | -1.4% | 1.3% | 1.7% |
| Gold US$/oz. | 2,516.32 | -0.2% | 5.3% | 31.3% |
| Brent US$/oz. | 72.69 | -9.1% | -5.0% | -19.8% |
| SA 10 year bond yield | 9.76 | -1.2% | -4.0% | -13.4% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 5.0 | 1.9 | 0.7 | 1.0 | 1.8 | 1.9 |
| Household consumption expenditure % y/y | 6.2 | 2.5 | 0.7 | 1.2 | 2.1 | 2.1 |
| Gross fixed capital formation % y/y | -0.4 | 4.8 | 3.9 | 1.2 | 5.0 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 4.6 | 4.3 | 4.6 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 3.6 | 5.0 | 4.5 |
| Repo rate (year end) %p.a. | 33.75 | 7.00 | 8.25 | 7.75 | 7.50 | 7.50 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.25 | 11.00 | 11.00 |
| USD/ZAR (average) | 14.80 | 16.40 | 18.50 | 18.30 | 17.50 | 18.20 |
