By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
This year was tumultuous as uncertainty on both the political and economic front kept expectations fluid. From the onset, it was obvious that a busy voting calendar across the globe would raise political and fiscal risks, while maintaining market volatility. Our own forecasts at the start of the year were for the Monetary Policy Committee (MPC) to start cutting interest rates in July, post South Africa's (SA) national election, but these were shifted to November given the volatility in economic data and market reactions, and then we shifted our forecast forward to September. In the United States (US), expectations have shifted wildly in both timing and quantum. They started the year with forecasts of around 150bps worth of cuts by the end of 2024, with the first cut expected in June. This was then revised to around 50bps in total, with some analysts projecting no cut at all. In the end, we had the first cut in both SA and the US in September, and the Fed has since delivered another 25bps following the initial 50bps. The commotion, however, has been renewed by the Republican sweep of the US elections. The change in US policy should be top-of-mind for monetary policy authorities across the globe, even if they remain mum about it.
Our expectations for the SARB MPC's final meeting for 2024 remain intact - another 25bp cut. Like the Fed and the Bank of England (BoE), the SARB will likely find it too early to consider the practical implications of Donald Trump's second presidential term and will, in any event, avoid contributing to the political debate. Therefore, they are likely to stick to the prevailing fundamentals of falling interest rates in advanced economies and softer local inflation. In addition, the structural reform agenda continues to gain traction and has done well for risk perception and could assist with lower structural inflation over the longer term.
That said, the MPC is likely to continue flagging upside risk to inflation. This is as geopolitical tensions in the Middle East prevail and market reactions to the US election outcome favour the dollar to the detriment of the dollar/rand exchange rate. This could have more immediate implications for inflation.
Even while not officially addressing the risk from Trump's touted policy changes, the MPC will be looking out for potential economic implications. First, the implementation of extensive import tariffs by the US and retaliation by targeted countries may keep inflation higher than projected. A curtailment of immigration in the US and increasingly right-leaning advanced economies could also raise the cost of labour. Higher inflation could also have an adverse impact on risk assets, with an additional impact on monetary policy in emerging markets. Secondly, looser fiscal policy in the US, and other regions that have now become encouraged to spend more on their own defence to either appease the Trump administration or hedge against its foreign policy, may reduce the effectiveness of monetary policy - pushing it to be tighter. There is also a likelihood that global growth is even slower, which would worsen the monetary policy dilemma.
While the magnitude of these risks is unfolding, they are likely to keep monetary policy cautious over the next few years. Whether it will affect the current cutting cycle, which we expect to end in May 2025, will require more information than currently on hand. For now, we still believe another 25bp interest rate cut is on the cards for next week's MPC meeting.
Week in review
The Quarterly Labour Force Survey (QLFS), a household-based employment survey (not seasonally adjusted), showed an increase in employment during 3Q24 by 293 840 q/q, completely offsetting the 92 416 jobs lost in 2Q24. Unemployment fell by 373 305 q/q, bringing the total number of unemployed individuals to 8 010 520. The official unemployment rate was 32.1% in 3Q24, reflecting a decrease from 33.5% in 2Q24. Youth unemployment remains critically high at 60.2% for the 15 to 24 age group, and 40.4% for the 25 to 34 age group, underscoring the urgent need for pro-growth structural reforms to spur economic expansion, particularly in high-employment multiplier sectors like construction.
Manufacturing output, not seasonally adjusted, contracted by 0.8% y/y in September, following a revised 0.8% y/y contraction (previously -1.2%) in August. The outturn was a surprise, defying the Reuters consensus prediction of a 0.9% y/y expansion. Seasonally adjusted output was flat (0.0%) after a 0.7% m/m decrease in August, contrasting with the manufacturing PMI business activity index, which rose to 53.1 points in September from 34.6 in August, indicating potential expansion. For the third quarter, manufacturing output increased by only 0.2% in 3Q24, down from 0.6% in 2Q24, signalling a reduced contribution to third-quarter GDP growth.
Mining production (not seasonally adjusted) expanded by 4.7% y/y in September, a marked improvement from the 0.3% y/y increase in August. The outturn surpassed Reuters consensus, which anticipated modest growth of 2.2% y/y. Seasonally adjusted mining output, which aligns with the official quarterly GDP calculation, rose by 3.8% m/m following a 3.3% m/m gain in August. After a 0.4% decline in 2Q24, mining output rebounded with a 1.0% increase in 3Q24, indicating a positive contribution to GDP growth.
Week ahead
On Wednesday, the RMB/BER Business Confidence Index (BCI) for 4Q24 will be published. The 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 reflected the impact of weak demand, it also suggested that conditions had improved, especially with the cessation of load-shedding, and businesses were more upbeat on the outlook. All sectors, except building contractors and wholesalers, recorded improved sentiment. However, even while slightly less optimistic, wholesalers remained the most upbeat sector. Lower inflation, 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 remain an impediment on overall sentiment.
Also on Wednesday, data on consumer inflation for October will be released. Consumer inflation eased further to 3.8% y/y in September, down from 4.4% in August, with monthly inflation remaining subdued at 0.1%. Core inflation held steady at 4.1% y/y, with a monthly increase of 0.3%. Food and non-alcoholic beverages inflation also remained stable, at 4.7% y/y, though monthly pressure was 0.6%. Counterbalancing monthly core and food inflation was fuel, which recorded a 3.8% monthly decline. Annual fuel inflation fell from 1.8% to -9.0%. We expect inflation to bottom out at 3.0% in October and stay below 4% through the first half of 2025, as positive base effects and continued declines in fuel prices support softer inflation.
Lastly, on Wednesday, data on retail sales for September will be released. In August, volume sales continued their positive streak, surging to 3.2% y/y from 1.7% in July- a sixth consecutive month of expansion. On a month-on-month basis, volumes increased by 0.5%, reversing a 0.2% decline in the previous month. Year-to-date, retail sales have increased by 1.3% compared to the same period last year, indicating a gradual improvement in consumer spending. This reflects a better consumer environment, particularly in 2H24, aided by declining fuel costs, uninterrupted energy supply since March, and recovering consumer sentiment. As inflation continues to subside and interest rates gradually fall, consumers can expect to see increased discretionary income, which could further boost spending.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 12 Nov | SA | Unemployment rate (%) | 3Q24 | 32.1 | 33.5 |
| SA | Manufacturing production % m/m | Sep | 0.0 | -0.7 | |
| SA | Manufacturing production % y/y | Sep | -0.8 | -0.8 | |
| 14 Nov | SA | Mining production % m/m | Sep | 3.8 | 3.3 |
| SA | Mining production % y/y | Sep | 4.7 | 0.3 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 20 Nov | SA | RMB/BER Business Confidence Index | 4Q24 | -- | 38.0 |
| SA | CPI % m/m | Oct | -- | 0.1 | |
| SA | Manufacturing production % y/y | Sep | -- | -1.2 | |
| 1 | SA | CPI % y/y | Oct | 3.0 | 3.8 |
| SA | Retail Sales % m/m | Sep | -- | 0.5 | |
| SA | Retail Sales % y/y | Sep | -- | 3.2 | |
| 21 Nov | SA | SARB interest rate announcement | Nov | 7.75 | 8.00 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 83,834.31 | -2.5% | -3.0% | 14.1% |
| USD/ZAR | 18.27 | 5.6% | 4.0% | 0.3% |
| EUR/ZAR | 19.29 | 3.1% | 0.7% | -2.7% |
| GBP/ZAR | 23.15 | 3.0% | 0.9% | 1.6% |
| Platinum US$/oz. | 940.94 | -5.7% | -5.5% | 5.8% |
| Gold US$/oz. | 2,564.85 | -5.2% | -3.2% | 30.6% |
| Brent US$/barrel | 72.56 | -4.1% | -6.3% | -12.0% |
| SA 10 year bond yield | 9.74 | -0.6% | -0.9% | -12.4% |
FNB SA Economic Forecast
| Economic Indicator | 2022 | 2023 | 2024f | 2025f | 2026f | 2027f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 1.9 | 0.7 | 1.0 | 1.9 | 1.9 | 2.2 |
| Household consumption expenditure % y/y | 2.5 | 0.7 | 1.4 | 2.3 | 2.1 | 2.4 |
| Gross fixed capital formation % y/y | 4.8 | 3.9 | -0.8 | 5.4 | 3.9 | 5.3 |
| CPI (average) %y/y | 6.9 | 6.0 | 4.5 | 4.3 | 4.7 | 4.5 |
| CPI (year end) % y/y | 7.2 | 5.1 | 3.4 | 5.0 | 4.6 | 4.5 |
| Repo rate (year end) %p.a. | 7.00 | 8.25 | 7.75 | 7.00 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 10.50 | 11.75 | 11.25 | 10.50 | 10.50 | 10.50 |
| USD/ZAR (average) | 16.40 | 18.50 | 18.20 | 17.50 | 18.20 | 18.80 |
