By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
On 26 September, the South African Reserve Bank (SARB) released the 2Q24 Quarterly Bulletin, shedding light on the state of the consumer. Here, we unpack key insights, focusing specifically on consumer balance sheets.
Labour market still missing in action
The 2Q24 data reveals that households are still reeling from high inflation and a stalling job market. While real disposable income increased by 0.4%1, labour income-crucial for most South African households-lagged inflation. The wage bill grew by 0.8% quarter-on-quarter (q/q), while inflation stood at 1.3% during the same period. Conversely, non-labour income surged by 3.7% q/q, buoyed by robust interest income from the high-interest rate environment and some support from dividend payouts. Looking ahead, as of 3Q24, surveyed expectations for salary increases average 5.6% for 2024, compared to our inflation forecast of 4.6%, suggesting that a real-wage recovery is underway. Anecdotal evidence from direct salary payments shows sustained inflation-adjusted growth in the last five months to August2, the first time since the pandemic. We anticipate that inflation will remain below the target of 4.5% over nearly the next year of data, with salary expectations for the next calendar year currently at 5.9%. This will further support real wages into 2025. Additionally, lower debt-service costs (more on this below) will boost consumer discretionary incomes, suggesting an improved consumer environment ahead.
1CPI adjusted.
2The BankservAfrica Take-home Pay Index (BTPI) showed a 1.9% real increase in August.
An improving consumer environment
Despite apparent wage income pressures, overall household indebtedness remains contained relative to the recent history. Seasonally adjusted household debt growth slowed in 2Q24, as credit extension to households moderated across most categories-save credit card debt. The debt-to-income ratio slightly decreased to 62.2% from 63.0%, reflecting faster growth in nominal disposable income relative to debt accumulation. This also indicates cooling lending activity in the non-bank sector, where volumes had previously been strong. The slowing debt trend reflects reduced affordability and tighter lending standards.
Moderating debt stock, stable interest rates, and faster income growth boosted consumers' discretionary income in 2Q24. Debt-servicing costs as a percentage of disposable income slowed marginally to 9.1% from 9.2% previously. We expect these costs to plateau in the coming months as borrowing costs decline. However, consumers have accumulated more expensive forms of credit, some not tied to the prime lending rate, which may limit or delay the pass-through of lower interest rates to overall debt servicing costs. This situation will partly depend on how consumers allocate pension withdrawals between debt repayment and consumption, indicating an uneven impact of interest rate cuts across consumer segments.
Positively, households' net wealth increased in 2Q24, with total asset values rising faster than total liabilities. The net wealth-to-income ratio rose to 393% from 389%, reflecting faster net wealth growth compared to nominal disposable income. The increase in asset values stemmed from rising share prices, despite declining housing stock values, likely benefitting more affluent consumers. Looking ahead, the stock market should continue to gain from eased domestic and global risks, alongside an improved consumer and business operating environment, which should foster faster economic growth. Most sentiment indicators show signs of tentative optimism across sectors, reflecting easing infrastructure and logistical constraints, and expectations of improved consumer fundamentals. From a housing perspective, we believe the property market is at the bottom of the cycle, anticipating increased buying activity and rising home values as borrowing costs decline and affordability improves, thereby supporting household balance sheets.
Week in review
The leading business cycle indicator increased by 0.7% m/m to 113.6 index points in July from 112.8 in June. Six out of the ten available constituent variables increased, with the largest positive contributions from trend growth in job advertisement space and the number of new passenger vehicles sold. Meanwhile, a narrower interest rate spread, and lower export commodity prices made the largest negative contributions. Stable energy supply, easing political uncertainty, slower inflation, and lower interest rates should support economic activity over the near term.
The FNB/BER Civil Confidence Index surged to a new eight-year high of 50 index points in 3Q24, rebounding from 44 points in 2Q24. This improvement was primarily driven by a significant recovery in profit margins, reaching their highest level since 2008. While activity growth moderated slightly in 3Q24 compared to the previous year's peak, the survey indicated increased tender activity and growing intentions to expand employment. However, respondents continued to express concerns about the negative impact of the construction mafia and government inefficiency on the sector.
Producer inflation moderated further, reaching 2.8% y/y in August from 4.2% y/y in July. The outturn reflected a sharper slowdown than the Reuters consensus forecast of 3.5%. Producer inflation was -0.3% m/m, marking the third successive month of deflation, driven by declining prices for petrol, diesel, as well as transport equipment parts. Intermediate producer inflation remained steady at 4.2% y/y, with slight monthly pressure of 0.2%. Year-to-date (January to August), producer inflation has averaged 4.4%, significantly lower than the 7.9% recorded over the same period last year, reflecting sustained easing of inflationary pressures. Notably, food products inflation is 3.6%, compared to 10.1% last year; paper and printed products inflation is 3.3%, down from 14.6%; transport equipment inflation has fallen to 2.2% from 11.4%; and furniture inflation has moderated to 3.3%, from 8.4% last year. We expect further moderation in producer inflation in September, potentially below 2.0% y/y, primarily reflecting favourable petrol and diesel price dynamics.
Employment in the formal non-agricultural sectors of the economy, as reflected in the Quarterly Employment Survey, increased by over 40 000 jobs or 0.4% q/q in 2Q24. Most of these jobs were in community services, which added over 90 000 jobs, or 3.1% q/q. Compared to 2Q23, 144 000 jobs (-1.3%) have been lost but over half a million jobs have been added since 2Q19. The latest estimates reflect over 10.7 million workers in the formal economy. Total gross earnings declined by 0.5% q/q but were 3.9% higher than in 2Q23. Notably, earnings were 34% higher than 2Q19 levels, beating inflation of 28%. With easing policy uncertainty and growing confidence in the economy's trajectory, growth and employment creation should improve. Furthermore, slower inflation should support profitability.
Week ahead
The week will kick off with the August release of Private Sector Credit Extension (PSCE) data. In July, PSCE growth moderated to 3.5% y/y, down from 4.3% y/y in June. This slowdown was primarily driven by a deceleration in corporate credit growth, which eased to 3.7% from 5.1% y/y. Household credit growth also moderated slightly, from 3.3% to 3.2% y/y over the same period. Adjusted for inflation, PSCE growth has been contracting, on average, by 1.2% since August 2023, underscoring unfavourable demand-supply dynamics amid high borrowing costs and tightened credit conditions.
Also on Monday, the trade balance data for August will be published. In July, the trade balance recorded a surplus of R17.6 billion, slightly lower than the R24.2 billion surplus recorded in June. The narrowing of the trade surplus reflected a 6.6% monthly increase in imports to R157.4 billion, while exports increased marginally by 1.8% to R175.0 billion. Still, the year-to-date (January to July) surplus amounted to R85.3 billion, 181% more than what it was over the corresponding period last year. This sustained trade surplus underscores weak domestic demand, with imports down by 6.4%. Meanwhile, exports are down marginally by 0.7%.
On Tuesday, the Absa manufacturing PMI for September will be published. The 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 do, however, remain concerned about supplier ability to manage rising demand given local logistical constrains.
Also on Tuesday, new vehicle sales data for September will be released. 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 outcome 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.
On Thursday, data on electricity generated and available for distribution for August will be released. 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.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 25 Sep | SA | Leading Indicator | Jul | 113.6 | 112.8 |
| 26 Sep | SA | FNB/BER Civil Confidence Index | 3Q24 | 50.0 | 44.0 |
| SA | PPI % m/m | Aug | -0.3 | -0.2 | |
| SA | PPI % y/y | Aug | 2.8 | 4.2 | |
| SA | Formal Non-Agricultural Employment % q/q | 2Q24 | 0.4 | -0.5 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 30 Sep | SA | Private Sector Credit Extension % y/y | Aug | -- | 3.5 |
| SA | Trade balance R billion | Aug | -- | 17.6 | |
| 1 Oct | SA | Absa/BER Manufacturing PMI | Sep | -- | 43.6 |
| SA | New Vehicle Sales % y/y | Sep | -- | -4.9 | |
| 3 Oct | SA | Electricity production % y/y | Aug | -- | 8.5 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 87,327.21 | 4.3% | 3.3% | 21.0% |
| USD/ZAR | 17.15 | -2.0% | -3.2% | -10.6% |
| EUR/ZAR | 19.19 | -1.7% | -3.1% | -4.8% |
| GBP/ZAR | 23.02 | -0.4% | -1.9% | -1.2% |
| Platinum US$/oz. | 1,007.31 | 1.9% | 5.6% | 13.5% |
| Gold US$/oz. | 2,670.20 | 3.2% | 5.8% | 42.4% |
| Brent US$/oz. | 71.60 | -4.4% | -10.0% | -25.8% |
| SA 10 year bond yield | 9.47 | -0.7% | -3.9% | -19.3% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023 | 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. | 3.75 | 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 |
| * To be reviewed soon | ||||||
