Economics Weekly
By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Quick recap of the previous MPC
The November 2024 SARB Monetary Policy Committee (MPC) Statement highlighted a challenging global economic backdrop, with a strong dollar weighing on exchange rates and reflationary pressures rising - posing the risk of tighter monetary policy. In SA, 3Q24 productive sector data was mixed, and there was a risk that near-term GDP could disappoint to the downside, and it did. That said, the possibility of data revisions as well as optimism around medium-term growth still supports the narrative that SA growth is on an uptrend. Medium-term growth will rely heavily on structural reform implementation.
According to the statement, inflation was slowing primarily on a stronger exchange rate and lower oil prices supporting the deceleration in goods inflation. However, higher electricity inflation is expected to propel higher inflation from 2H25. Nevertheless, inflation is expected to remain contained over the medium term. This is expected to support a continued slowing in backward-looking inflation expectations, and we have subsequently seen this come through in the 4Q24 BER inflation expectations survey results which were broadly anchored at the SARB's preferred target.
The MPC forecast growth to rise from 1.1% in 2024 to 2.0% in 2027, while inflation is expected to oscillate around 4.5% over the forecast horizon, falling to 4.0% in 2025. Both growth and inflation risks were balanced, and the committee cut rates by 25bps to 7.75%.
Expectations for the January meeting and the remainder of 2025
Inflation data points since the last MPC meeting have continued to surprise analysts to the downside. Headline inflation has remained at the bottom of the inflation target band, supported by positive base effects and demand-driven pressures remaining contained. This trend is expected to remain intact until 2H25 when these drivers should become less favourable, for example domestic demand is expected to improve. Therefore, while current readings of data suggest that there is ample space to cut interest rates, a forward-looking approach still dictates that Taylor rule projections (observing one-year-ahead inflation projections) will dampen the amount of interest rate cuts. Nevertheless, the MPC's expectation that inflation will remain around 4.5% over the forecast horizon, should they remain intact, still supports a continued cutting cycle. In line with this, we see another 75bps worth of cuts delivered cumulatively over the first three meetings in 1H25, starting with 25bps at next week's meeting.
Risks to the outlook
The previous MPC meeting considered both upside and downside inflation risk scenarios. The former included higher administered prices, e.g. electricity inflation, and a more challenging global backdrop - arguably trade tariffs and higher inflation in certain regions, a stronger dollar, and tighter Fed policy is pertinent here. The latter scenario included de-escalated geopolitical risk and lower oil prices, which are now more firmly in view. On balance, the MPC should consider the impact of the unfolding of both these scenarios and the cutting cycle should be uninterrupted, but we will continue to monitor the risk of less cuts in the current cycle.
Week in review
Mining production (not seasonally adjusted) contracted by 0.9% y/y in November 2024, after expanding by a downwardly revised 1.1% (previously 1.4%) in October. Excluding gold, mining output expanded by 0.7% y/y over the same period. Monthly seasonally adjusted output, which is critical for quarterly GDP calculations, declined by 0.2% after contracting by 2.8% (previously -3.0%) in October. In the three months to November, mining output was up by 4.0% - suggesting a potential boost to 4Q24 GDP growth, pending the December data print.
Headline inflation lifted slightly to 3.0% y/y in December, remaining at the lower end of the inflation target band, from 2.9% in November. Monthly pressure was 0.1%, reflecting slight contributions from fuel and food inflation. Headline inflation averaged 4.4% in 2024, down from 6.0% in 2023. We see inflation remaining subdued in 1H25, albeit rising steadily into the second half of the year. We anticipate that headline inflation will post 3.2% in January and settle above 5% by the end of the year. This will be dictated by fading positive base effects and improving demand. Nevertheless, average inflation should be softer than in 2024. Risks to the outlook include a more robust normalisation in services inflation as well as a faster acceleration in administered price inflation. These local risks could be mitigated by weak global growth and contained commodity price pressures.
After a solid 6.2% y/y in October, retail sales accelerated further to a robust 7.7% growth in November, significantly outpacing the Reuters consensus expectation for a 5.5% increase. On a month-on-month basis, volumes increased by 0.8%, albeit down from a 1.6% increase in October. These numbers bode well for 4Q24 GDP growth and reflect consumer spending benefits from the two-pot system pension withdrawals, the declining inflation trajectory, particularly fuel costs, as well as improved consumer sentiment. Year-to-date, retail sales have increased by 2.4% compared to the same period last year, the highest level since 2019. We expect this momentum to continue into 2025.
Week ahead
The leading business cycle indicator for November will be released on Tuesday. In October, the indicator rose by 1.1% m/m, following a 1.4% increase in September. This growth reflected broad-based improvements across eight of the ten constituent variables, driven primarily by trend growth in new passenger vehicle sales and job advertisement space. However, the overall increase was partly offset by a decline in the number of residential building plans passed and a deceleration in real money supply (M1) trend growth. Encouragingly, the leading indicator expanded by 1.8% y/y in October, marking the seventh consecutive month of annual growth. This sustained upward trend points to near-term economic recovery, aligning with current economic growth projections.
On Thursday, Private Sector Credit Extension (PSCE) data for December will be released. In November, PSCE grew by 4.2% y/y, marginally below the 4.3% in October. Household credit moderated slightly to 3.1% from 3.2% y/y, largely weighed on by slower, although still robust, car finance credit. Mortgages and unsecured credit remained stable at 3.3% and 2.1%, respectively. On the corporate side, credit uptake slowed from 5.6% to 5.4% in November, weighed on by a deceleration in commercial vehicle financing and overdrafts. Overall, credit growth is currently outpacing inflation and should continue to improve as interest rates decline.
Producer inflation data for December will be also released on Thursday. In November, producer prices remained in deflation at -0.1% y/y, marking a slight improvement from -0.7% y/y in October. On a monthly basis, prices were flat (0%), following a decline of -0.7% in October, driven by increases in fuel and food prices. Excluding petroleum-related products, producer inflation stood at 2.6% y/y and -0.1% m/m. Intermediate producer inflation, which measures input prices entering the production process, rose to 5.7% y/y from 5.5% y/y, reflecting persistent inflationary pressures within the production cycle. These pressures stemmed primarily from basic and fabricated metals, as well as chemical, rubber, and plastic products. We expect that producer inflation exited deflation in December but remained subdued, likely below 1.0%.
On Friday, the monthly trade balance for December will be released. In November, the trade balance recorded a surplus of R34.7 billion, the largest monthly surplus since March 2022, when it reached R47.2 billion. Exports rose by 1.2% m/m to R180.9 billion, while imports saw a significant decline of -11.2% m/m to R146.2 billion. For the first eleven months of 2024, the trade balance registered a cumulative surplus of R181.3 billion, a notable increase compared to the R110.9 billion surplus during the same period in 2023. During this time (January to November 2024), exports declined slightly by just over 1%, while imports fell by 6.7%. The drop in imports primarily reflects subdued demand for machinery and electrical equipment, vehicles and transport equipment, and mineral products.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 21 Jan | SA | Mining production % y/y | Nov | -0.9 | 1.1 |
| SA | Mining production % m/m | Nov | -0.2 | -2.8 | |
| 23 Jan | SA | CPI % y/y | Dec | 3.0 | 2.9 |
| SA | CPI % m/m | Dec | 0.1 | 0.0 | |
| SA | Core CPI % y/y | Dec | 3.6 | 3.7 | |
| SA | Core CPI % m/m | Dec | 0.0 | 0.0 | |
| SA | Retail sales % y/y | Nov | 7.7 | 6.2 | |
| SA | Retail sales % m/m | Nov | 0.8 | 1.6 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 28 Jan | SA | Leading indicator | Nov | -- | 114.0 |
| 30 Jan | SA | Private Sector Credit Extension % y/y | Dec | -- | 4.2 |
| SA | PPI % y/y | Dec | -- | -0.1 | |
| SA | PPI % m/m | Dec | -- | 0.0 | |
| SA | Trade balance R billion | Dec | -- | 34.7 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 83,944.07 | 0.3% | -0.9% | 14.5% |
| USD/ZAR | 18.51 | -1.7% | -0.3% | -2.8% |
| EUR/ZAR | 19.28 | -0.6% | -0.2% | -6.8% |
| GBP/ZAR | 22.87 | -0.7% | -1.7% | -5.4% |
| Platinum US$/oz | 946.89 | 1.2% | 0.5% | 4.7% |
| Gold US$/oz | 2,754.87 | 1.5% | 5.4% | 35.8% |
| Brent US$/oz | 78.29 | -3.7% | 7.8% | -1.6% |
| SA 10 year bond yield | 9.73 | -1.6% | 0.0% | -8.3% |
FNB SA Economic Forecast
| Economic Indicator | 2022 | 2023 | 2024f | 2025ff | 2026f | 2027f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 1.9 | 0.7 | 0.7 | 1.9 | 1.9 | 2.2 |
| Household consumption expenditure % y/y | 2.5 | 0.7 | 1.0 | 2.2 | 2.2 | 2.4 |
| Gross fixed capital formation % y/y | 4.8 | 3.9 | -3.2 | 3.8 | 3.5 | 4.9 |
| CPI (average) %y/y | 6.9 | 6.0 | 4.4 | 4.4 | 4.5 | 4.5 |
| CPI (year end) % y/y | 7.2 | 5.1 | 3.0 | 4.9 | 4.8 | 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 |
| USDZAR (average) | 16.40 | 18.50 | 18.30 | 17.80 | 17.90 | 17.60 |
