Prospects for 2023 improve but weak fundamentals persist
The second quarter is now complete, and the available high-frequency data, though mixed, points to slightly better economic outcomes than previously envisaged. Improved global growth prospects, domestic load-shedding reprieve, and slower inflation have been key to this improvement. Nevertheless, local economic fundamentals remain weak, underscoring prevailing domestic and global headwinds.
Economic growth lifts marginally
The weakness in the domestic economy persists amid the ongoing impact of higher inflation and restrictive monetary policy. This is echoed by the prolonged annual decline in the composite business cycle leading economic indicator, which reflects renewed economic weakness over the past few months. Confidence indices were more subdued in 2Q23 relative to the prior quarter, reflecting less optimism across the spectrum. Also, SA remains vulnerable to slower global demand and trade activity as a small and open economy. We have cautiously lifted our 2023 growth forecast to a still muted 0.2% from -0.1%, mainly on account of an improved starting point. This is consistent with the latest Bloomberg consensus forecast. Growth is expected to gradually lift to 1.0% (previously 1.1%) in 2024, reaching 1.8% in 2025 and 2026. Continued electricity and logistics challenges remain a binding constraint to economic outcomes and SA's overall growth potential. We expect load-shedding (predominantly stages 4-6) to persist well into the 1H24 before gradually easing as private-sector energy generation comes online.
Inflation moderating but interest rates to remain higher for longer
Having experienced the highest annual inflation since 2009 last year, we are now benefitting from base effects that have pulled inflation down. The food and fuel price shocks that lifted headline inflation from the middle of 2022 are pulling in the opposite direction. So far, fuel deflation has contributed more meaningfully, while food is only expected to move to single-digits in the coming months. Core inflation has lifted on the passthrough of price pressures at the ports, factory gates and retail stores, but the extent has been less severe than previously expected, allowing a downward revision in headline inflation. There is a likelihood that goods inflation will remain elevated even as load-shedding and the rand have improved and producer inflation falls, reflecting some margin claw back. However, weakening consumer fundamentals should generally weigh on pricing power. We forecast average headline inflation of 6.0% this year, slower than 6.9% last year, and falling to just above 5% next year. As inflation continues to slow, we see real interest rates climbing above the neutral level into the middle of 2024, further restricting economic activity with a gravity pull on inflation. At that stage, the MPC would be able to initiate a cutting cycle. The consensus of analysts predicts that this could be as early as at the start of 2024, while money markets see cuts coming in 2H24. Nevertheless, the cutting cycle should be shallow, with the repo settling at 7.0%, as global inflation risks remain elevated amid weakening co-operation and climate challenges - falling in line with the higher-for-longer theme.
Consumers headwinds persist, but non-wage income and credit growth provide support
Consumers continue to navigate tough headwinds, including weak labour market outcomes and elevated debt costs. Wage gains have been modest and unable to keep up with inflation across most sectors, having recorded just 3.8% in 1Q23, versus 7.0% inflation. Employment intentions have broadly moved sideways, reflecting employers' nervousness about expanding headcount in the current environment. Nonetheless, hiring intentions continue to hint at job gains in industries along the energy value chain, such as civil construction, as well as the services sector, though unlikely to fundamentally change the overall employment trajectory. So far, household income has found support from non-labour income on the back of robust interest income, which is benefiting from the high-interest rate environment, rental income, as well as dividend payouts. Household credit, though slowing, remains reasonably strong compared to the same period last year, supported by consumption credit. At a retail level, however, volumes are declining. Retail sales are currently down by 0.7% on a three-month-to-three-month basis, suggesting that consumers are feeling the pinch, though slightly less severe than initially anticipated. Overall, we expect household consumption expenditure to slow to 1.2% this year, from 2.5% in 2022 but is an improvement from the previous 0.8% forecast.
From a policy perspective, the high co-movement between South Africa's exports and world trade emphasises the importance of global trade integration. It further implies that in the absence of trade restrictions, South Africa benefits immensely from upswings in global trade activity. This calls for a continued and accelerated implementation of energy and transport logistics reforms to eventually unlock industrial production capacity and export competitiveness. At this stage, we remain less optimistic about South Africa's export volume growth, expecting a modest 1.3% average annual growth over the medium term.
Week in review
Private sector credit extension (PSCE) growth slowed to 6.3% y/y in June, from 6.8% in May and 7.1% in April. The slowdown reflected a moderation in both corporate and household credit. Corporate credit growth slowed to 6.1% from 6.9% previously, dragged down by slower mortgage extensions, from 6.2% to 6.1%, as well as investments, which declined by 5.6% from 3.0% growth in May. Supporting corporate credit were instalment sales, which quickened to 15.1% from 13.9% previously, and overdrafts, which recorded 11.8% from 9.4% in May. General loans, which accounts for the biggest share of corporate credit—approximately 45%, also ticked higher in June, to 7.9% from 7.2% previously. Year-to-date (Y TD), corporate credit extension has grown by 7.5%, compared to 4.3% in the corresponding period last year.
Credit extended to households slowed to 6.5% in June, from 6.7% in the previous month, dragged lower by unsecured credit, which slowed to 7.4% from 7.9%. Within unsecured credit, however, credit card uptake quickened to 9.2%, from 8.9% in May. Asset-backed credit grew by 6.2% in June, slightly lower than 6.4% in May. This was due to slower uptake of housing finance, from 6.0% in May to 5.8% in June, while instalment sales, comprising predominantly of car finance, remained steady at 7.6%. Y TD, household credit extension has grown by 7.2%, compared to 6.2% in the corresponding period last year. We expect PSCE to continue slowing, as the impact of interest rates hikes filters through, and lending standards tighten.
The nominal trade balance (not seasonally adjusted) unexpectedly switched to a R3.5 billion deficit in June from a downwardly revised R9.6 billion surplus (previously R10.2 billion) in May. The deficit reflected a monthly decline of 8.6% in exports to R167.62 billion, while imports marginally declined by 1.6% to R171.16 billion. The Y TD cumulative trade balance amounted to R5.6 billion, materially lower than the R129.6 billion trade surplus recorded over the corresponding period last year. This is consistent with the expected widening of the current account deficit from -0.5% of GDP to -1.9% over the medium term. Y TD export growth has underperformed import growth, posting a subdued 1.9% y/y, while imports have posted a solid 17.5% y/y. The weak export growth performance underscores a 16.8% decline in precious metals and a 1.7% decline in mineral products. Meanwhile, base metals exports are up by 13.3%, and vehicle and associated transport equipment exports are up by 12.1%. Import growth reflects a solid 42.5% Y TD increase in imports of machinery and equipment, a 39.0% increase in vehicle and associated transport equipment and an 8.7% increase in mineral products.
The Absa manufacturing PMI slid to 47.3 index points in July after registering 47.6 points in June, still highlighting a contractionary environment. The business activity index shed nearly 11 index points, which likely reflects the impact of higher load-shedding compared to June as well as supplier delivery issues. The deliveries index lifted to the highest level this year, likely highlighting the disruptions on the supply chain and activity due to the torching of trucks on the N3 during the month. New sales orders fell, amid restrictive monetary policy and lower external demand. Fortunately, the price index continued to slow and will likely contribute to slowing producer inflation going forward.
Total new vehicle sales (not seasonally adjusted) marked a weak start to 2H23, increasing by 1.3% y/y in July after increasing by 14.0% y/y in June. This weakening reflected a sharp 9.7% y/y decline in new passenger car sales, following average annual decline of 0.8% in 1H23. Y TD, new passenger car sales are down by 2.2%, materially lower than the full-year growth of 18.2% in 2022. This is consistent with weaker consumer fundamentals and a restrictive monetary policy environment. Growth in sales of new commercial vehicles continued into 2H23, although at a moderate pace of 29.6% y/y compared to 47.6% y/y in June. Y TD commercial vehicle sales are up by 20.4%, underscoring strong performance in light commercial and extra heavy commercial vehicles.
Electricity production (not seasonally adjusted) declined by 3.7% y/y in June, slower than -8.7% in May (revised up from -9.0%) and extended the annual decline to 21 consecutive months. Seasonally adjusted electricity production increased by 3.6% m/m, after declining by 0.8% previously, and highlights the reduction of generation capacity outages during that month. Consumption of electricity was down 3.2% y/y, better than the 7.7% drop in May (revised up from -7.8%), seasonally adjusted consumption was up by 3.4% m/m. Y TD (January - June) electricity consumption is down by over 1 200 MW compared to the same period last year and by over 2 000 MW compared to the corresponding period in 2019. Eskom's Energy Availability Factor (EAF) at 54.5% Y TD, is well below the target of 70%, highlighting the importance of prevailing private-sector energy generation investments that will allow SA to harness more robust growth as they incrementally augment state supply.
Week ahead
On Monday, data on SA's foreign exchange reserves for July will be published. Gross foreign exchange reserves increased to $61.55 billion in June, from $61.30 billion in May. The increase reflected a US$500 million foreign loan to government from the New Development Bank, valuation adjustments given foreign currency and asset price changes, as well as a lower dollar-denominated gold price. These were mitigated by government-related foreign exchange payments.
On Thursday, data on mining production for June will be published. In May, mining output (not seasonally adjusted) shrank by 0.8% y/y after an expansion of 2.3% y/y in April, which was preceded by 14 consecutive months of annual decline. Seasonally adjusted mining output shrank sharply by 3.8% m/m, following a downwardly revised monthly expansion of 1.5% (previously 1.8%) in April.
Also on Thursday, data on manufacturing production for June will be released. In May, manufacturing output (not seasonally adjusted) grew by 2.5% y/y, extending the first annual gain of 3.6% y/y registered in April 2023 following six consecutive months of decline. Seasonally adjusted manufacturing output, which aligns with the official calculation of quarterly GDP growth, shrank by 1.3% m/m after expanding by 0.7% m/m.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 31 Jul | SA | Private Sector Credit y/y | Jun | 6.3% | 6.8% |
| SA | Trade Balance (R billion) | Jun | -3.5 | 9.6 | |
| 1 Aug | SA | Absa Manufacturing PMI | Jul | 47.3 | 47.6 |
| SA | Naamsa Vehicle Sales y/y | Jul | 1.3% | 14.0% | |
| 3 Aug | SA | Electricity Consumption y/y | Jun | -3.2% | -7.7% |
| SA | Electricity Production y/y | Jun | -3.7% | -8.7% |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 7 Aug | SA | Foreign exchange reserves ($ billion) | Jul | -- | 61.6 |
| 10 Aug | SA | Mining production %m/m | Jun | -- | -3.8% |
| SA | Mining production %y/y | Jun | -- | -0.8% | |
| SA | Manufacturing production %m/mI | Jun | -1.3% | ||
| SA | Manufacturing production %y/y | Jun | 2.5% |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 76,747.20 | -1.9% | 0.7% | 11.9% |
| USD/ZAR | 18.68 | 4.8% | 0.2% | 11.4% |
| EUR/ZAR | 20.45 | 4.5% | 0.9% | 20.3% |
| GBP/ZAR | 23.77 | 4.2% | 0.3% | 16.7% |
| Platinum US$/oz | 914.25 | -2.3% | -0.1% | 1.8% |
| Gold US$/oz | 1,933.74 | -0.6% | 0.4% | 9.6% |
| Brent US$/oz | 85.14 | 1.1% | 11.7% | -12.0% |
| SA 10 year bond yield | 10.44 | 2.2% | -0.9% | 0.9% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f |
|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.2 | 1.0 | 1.8 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 1.2 | 1.1 | 1.1 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 4.2 | 3.1 | 4.2 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.2 | 4.8 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.3 | 4.8 | 4.8 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 7.50 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.00 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.00 | 17.50 |
