Economics weekly
By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Since the start of the interest rate hiking cycle in November 2021, interest rates have increased cumulatively by 475 basis points (bps), with the repo rate currently standing at 8.25% per year and the prime lending rate at 11.75%. This uptick has noticeably affected the portion of household income allocated to servicing debt, rising from an annualised nominal R312 billion in the fourth quarter of 2019 to R411 billion in the final quarter of 2023. Inflation remains persistent, recently rising to 5.6% y/y in February after averaging 5.9% in 2023, surpassing wage income growth of 5.6% in the same year. Consequently, demand, particularly that associated with interest rate-sensitive spending, has weakened, and reflects a strained consumer. While interest rates have remained unchanged since May 2023 as the SARB Monetary Policy Committee (MPC) monitors the ongoing turbulent disinflation process, the impact on the broader economy continues to permeate.
In light of this context, we delve into the overall state of financial conditions and contend that there is a compelling rationale for the MPC to begin loosening monetary policy to uphold stability and bolster cyclical growth.
South Africa's broader financial conditions are comparatively tighter
Our in-house financial condition index, which we use to monitor broader financial conditions beyond just interest rates, suggests that alongside tighter monetary policy, overall financial conditions are constraining economic activity (Figure 1). The index currently stands below the neutral zero mark, indicating tighter financial conditions. Lately, it has been close to -1.0, which reflects a significant tightening compared to the -0.1 recorded in November 2021 at the start of the interest rate hiking cycle. This contrasts with the trajectory of the US financial conditions index which suggests that, despite the US Federal Reserve (Fed) tightening monetary policy, broader financial conditions remain relatively accommodative. This, coupled with resilient growth in the US, may be why the Fed is delaying interest rate cuts.
However, the local economy is grappling with a severe scenario, marked by a low-growth environment and consumers bearing the brunt of relatively tighter financial conditions. Household consumption expenditure crawled at a mere 0.7% last year, a significant drop from 2.5% in 2022, and reflected a mild technical recession between the second and third quarters of 2023. Our assessment of the restrictive broader financial conditions underscores a continued decline in inflation-adjusted credit growth. Moreover, we note a weaker currency, a sharp dip in the inflation-adjusted JSE All Share index, and a sustained fall in real residential property price growth.
While inflation may have reached its peak, the ongoing disinflation trajectory remains precarious, underscoring material upside risks and necessitating the MPC to exercise extreme caution in avoiding premature interest rate cuts. However, prolonging rate cuts beyond necessity, particularly when broader financial conditions are already restrictive, could further stifle growth and heighten the likelihood of a technical recession. While the US Fed rate remains pivotal for global financial conditions through various channels, the situation in the US differs significantly from South Africa's when viewed from broader financial conditions and consumer perspectives. This underscores the need for the MPC to consider initiating rate cuts. Our long-standing view is that rate cuts are likely to materialise at the beginning of the second half of this year, although the fiscal environment and inflation risks present a risk of further delays.
Week in review
Gross foreign reserves increased to $62.32 billion in March from $61.65 billion in February, reflecting an increase in gold reserves to $8.91 billion from $8.18 billion that was supported by a higher dollar-denominated gold price. Foreign exchange reserves fell slightly to $47.20 billion from $47.25 billion, highlighting net foreign exchange payments made on behalf of government. Special Drawing Rights holdings also declined slightly to $6.21 billion from $6.23 billion, partly reflecting valuation adjustments as the US dollar appreciated.
Mining production, not seasonally adjusted, expanded strongly by 9.9% y/y in February, following an upwardly revised decline of 2.8% y/y (previously reported as a 3.3% decline) in January. Seasonally adjusted mining production, crucial for calculating real quarterly GDP growth, expanded by 5.0% m/m, rebounding from a 0.4% (previously 0.8%) monthly contraction. While February's monthly growth was robust, sustained growth will be necessary in March for the mining sector to contribute positively to first-quarter GDP growth. Maintaining the 2.3% quarterly growth achieved in the fourth quarter of 2023 will likely be challenging.
Year-to-date, mining output is up by 3.3% y/y, consistent with our view that activity in the sector will recover this year after declining by 0.3% in 2023 and 7.1% y/y in both 2023 and 2022. The envisaged recovery underscores the reduction in load-shedding intensity. However, activity in this sector will be constrained by prevailing port and rail inefficiencies, as well as the potential impact of deteriorating water infrastructure. External growth dynamics are also critical, particularly as growth in China experiences moderation.
Manufacturing production, not seasonally adjusted, expanded by 4.1% y/y in February, following an increase of 2.9% y/y (upwardly revised from 2.6% y/y) in January. However, seasonally adjusted manufacturing output shrank by 0.3% m/m after expanding by a downwardly revised 0.4% m/m (previously 0.8%) in January. This decline is disappointing, particularly given the subdued quarterly GDP growth regime. A mild decline in March would cause the manufacturing sector to drag quarterly GDP growth in the first quarter, and the manufacturing PMI reading for March is not encouraging in this context.
Despite the persistent challenges, the manufacturing sector has shown remarkable resilience. It expanded by 0.5% in 2023, marking a modest rebound from the 0.3% decline in 2022. The year-to-date expansion of 3.5% y/y underpins our view that average annual growth in manufacturing output will be sustained this year. This sentiment is echoed by the manufacturing PMI expected business conditions index, which rose to 62.1 points in March, indicating that manufacturers expect operating business conditions to improve over the near term. Nevertheless, the pace of growth should be consistent with weak domestic and external demand as well as ongoing structural constraints.
Week ahead
On Wednesday, data on consumer inflation for March will be released. Consumer inflation lifted to 5.6% in February from 5.3% in January, with monthly pressure of 1.0%. Driving the monthly pressure was core inflation, which added nearly 0.9ppts, while fuel added over 0.1ppt. Core inflation lifted by 1.2% m/m and 5.0% y/y, primarily driven by medical insurance inflation. Fuel increased by 3.0% m/m and 5.4% y/y. Fortunately, food and NAB inflation continued to ease, settling at 6.1% y/y versus 7.2% previously. We expect further monthly pressure on headline inflation in March, as periodical survey outcomes such as education and housing, push core inflation up and fuel price inflation lifts. Nevertheless, annual headline inflation could slow to 5.5% y/y on positive base effects. The disinflation trend is expected to continue as the year progresses, but this view is threatened by hostile weather that has affected crop estimates as well as higher oil prices as geopolitical tensions remain elevated.
Also on Wednesday, retail sales data for February will be released. In January, volumes fell short of expectations and declined by a significant 2.1%, following a robust 3.2% increase in December 2023. Seasonally adjusted sales volumes dropped by 3.2% m/m-the most substantial monthly decline since the July 2021 riots. The weak performance in January was broad-based, with five out of seven retail segments recording annual contractions, underscoring the ongoing cost-of-living crisis consumers face.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 8 Apr | SA | Gross foreign reserves $ billion | Mar | 62.3 | 61.7 |
| 11 Apr | SA | Mining production % m/m | Feb | 5.0 | -0.4 |
| SA | Mining production % y/y | Feb | 9.9 | -2.8 | |
| SA | Manufacturing production % m/m | Feb | -0.3 | 0.4 | |
| SA | Manufacturing production % y/y | Feb | 4.1 | 2.9 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 17 Apr | SA | CPI % m/m | Mar | -- | 1.0 |
| 11 Apr | SA | CPI % y/y | Mar | -- | 5.6 |
| SA | Retail sales % m/m | Feb | -- | -3.2 | |
| SA | Retail sales % y/y | Feb | -- | -2.1 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 75,303.25 | -0.1% | 2.5% | -3.1% |
| USD/ZAR | 18.73 | 0.1% | 0.4% | 1.9% |
| EUR/ZAR | 20.09 | -0.9% | -1.5% | -0.8% |
| GBP/ZAR | 23.50 | -0.6% | -1.5% | 2.3% |
| Platinum US$/oz. | 979.58 | 5.8% | 6.4% | -3.5% |
| Gold US$/oz. | 2,373.24 | 3.7% | 10.0% | 17.8% |
| Brent US$/oz. | 89.74 | -1.0% | 9.5% | 2.8% |
| SA 10 year bond yield | 11.56 | 2.3% | 5.0% | 9.0% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.6 | 1.3 | 1.6 | 1.8 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 0.7 | 1.4 | 1.6 | 1.8 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 4.2 | 4.4 | 4.4 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.2 | 4.6 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.8 | 4.8 | 4.5 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 7.50 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.00 | 10.50 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.70 | 17.70 | 18.30 |
