By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Heightened political uncertainty often dampens economic activity. Businesses struggle to make critical investments and employment decisions when policy direction is unclear. Similarly, households become cautious about major financial commitments, such as taking up a mortgage. This week, we explore the impact of recent political uncertainty in South Africa, specifically the lead-up to the national elections, on business sentiment. We analyse two key business confidence indicators to understand how both pre-election anxieties and expectations about the outcome influenced business decisions.
Despite pre-election jitters, the RMB/BER Business Confidence Index (BCI) for 2Q24 showed a slight improvement. Around a third of businesses (35%, up from 30% in Q1) expressed satisfaction with the current conditions. This broad-based improvement was seen in four out of the five surveyed sectors. However, confidence remained below the long-term average, suggesting that overall business conditions, though improving, still constrain robust economic activity (Figure 1).
Similarly, the FNB/BER Building Confidence Index, which encompasses the entire building value chain (as opposed to just contractors as is in the BCI), also revealed improved sentiment. Interestingly, here the improvement was broad-based across the entire value chain, although still not at the historical average (Figure 2).
Both surveys highlight interesting commonalities. First, business conditions in 2Q24 exceeded initial expectations. Business activity improved across most industries, likely reflecting the benefits of more consistent energy supply during the period. Second, there was a general expectation of further improvement after the elections. Participants across both surveys indicated customer order delays due to election uncertainty, with anticipation of a post-election surge. Consequently, the near-term outlook was positive across most industries. Naturally, the realisation of these expectations hinges partly on the nature and resulting policy climate of the elected government.
At the time of writing, the possibility of a "government of national unity" (GNU) has emerged, with all parties potentially invited to participate. So far, the EFF and Action SA have publicly declined the invitation. A GNU is a broad coalition government that is typically formed during times of crisis or significant political transition to create stability and inclusivity. It achieves this by reducing partisan conflict and ensuring diverse representation in decision-making. Case studies from various countries suggest that a successful GNU hinges on factors such as strong leadership, equitable power-sharing, clear agreements, trust, and the ability to navigate both external pressures and public expectations. We eagerly await details on the proposed GNU's structure, as this will shape views on the potential business climate. In the meantime, the prospect of a GNU offers a cause for optimism, potentially lifting sentiment and propelling economic growth forward.
Week in review
After plunging by 16 points in Q1, the FNB/BER Building Confidence Index improved by eight points to 35 in 2Q24. The improvement in sentiment was broad-based, with five out of the six sectors reporting higher confidence compared to the previous quarter. Underpinning the better business mood were signs of increased activity and sales across the building value chain. Production of building materials also improved, likely reflecting that manufacturing firms are taking advantage of the uninterrupted electricity supply to re-build their stock, and/or the anticipation of stronger demand post-elections. Nevertheless, the relatively upbeat results in 2Q24 are at odds with the 1Q24 official statistics that paint a picture of a sector in deep distress.
Total manufacturing production, not seasonally adjusted, expanded by 5.3% y/y in April after contracting by 6.5% y/y in March. Seasonally adjusted manufacturing output, which aligns with the official calculation of quarterly GDP, expanded by 5.2% m/m, more than offsetting the 2.5% monthly decline in March. This marked a good start to 2Q24 after the manufacturing sector dragged GDP growth in 1Q24.
The 5.3% y/y increase in output reflected a broad-based performance, with nine out of ten manufacturing divisions experiencing growth. Among the large divisions, output in the petroleum, chemical products, rubber, and plastic products division increased by 5.1% y/y, contributing 1.1ppts. This was followed by the wood and wood products, paper, publishing, and printing division, which increased by 9.9% y/y, contributing 0.9ppts. The food and beverages division increased by 4.0% y/y, adding 0.9ppts. Output in the basic iron and steel, non-ferrous metal products, metal products, and machinery division expanded by 4.1% y/y, also contributing 0.9ppts. The motor vehicles, parts and accessories, and other transport equipment division increased by 6.5% y/y, with motor vehicle production rising by 12.2% y/y (and 21.3% m/m).
Total mining production, not seasonally adjusted, increased slightly by 0.7% y/y in April after declining by an upwardly revised 4.8% y/y (previously 5.8% y/y) in March. Seasonally adjusted output increased by 0.8% m/m, which was insufficient to reverse the 4.4% monthly decline in the prior month. The subdued monthly rebound, especially after the mining sector de-stocked in 1Q24, is concerning given that the country did not experience load-shedding in April. This likely reflects subdued, albeit stable, external demand and relatively weak commodity prices.
Week ahead
On Wednesday, data on consumer inflation for May will be released. Headline inflation softened to 5.2% in April from 5.3% in March, with monthly pressure of 0.3%. Driving the monthly pressure was core and fuel inflation. Core inflation lifted by 0.2% m/m and 4.6% y/y, primarily driven by alcoholic beverages and tobacco. Fuel increased by 1.9% m/m and 9.0% y/y, while food and NAB inflation continued to slow, settling at 4.7% y/y from 5.1% previously. We expect monthly pressure on headline inflation to ease further to 0.2% in May and annual inflation to remain unchanged. Beyond May, core inflation should stabilise, fuel price dynamics should be more positive, but food inflation should reflect some upward pressure from adverse weather conditions. Average annual headline inflation should be just above 5% for 2024.
Also on Wednesday, retail sales data for April will be released. In March, retail sales exceeded expectations and expanded by 2.3% y/y from a decline of 0.7% in February. On a month-on-month basis, volumes increased by 1.4%, a momentum gain from the 1.0% experienced in February, and -3.3% in January. The March volume sales were likely supported by holiday-related consumer shopping activity, which likely eased in April.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 10 Jun | SA | FNB/BER Building Confidence Index | 2Q | 35 | 27 |
| 11 Jun | SA | Manufacturing production % m/m | Apr | 5.2 | -2.5 |
| SA | Manufacturing production % y/y | Apr | 5.3 | -6.5 | |
| 13 Jun | SA | Mining production % m/m | Apr | 0.8 | -4.8 |
| SA | Mining production % y/y | Apr | 0.7 | -4.8 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 19 Jun | SA | CPI % m/m | May | 0.2 | 0.3 |
| SA | CPI % y/y | May | 5.2 | 5.2 | |
| SA | Retail Sales % m/m | Apr | -- | 1.4 | |
| SA | Retail Sales % y/y | Apr | -- | 2.3 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 76,382.02 | -1.0% | -2.9% | -2.1% |
| USD/ZAR | 18.42 | -2.9% | 0.4% | 0.5% |
| EUR/ZAR | 19.77 | -4.2% | -0.6% | -0.5% |
| GBP/ZAR | 23.52 | -3.1% | 1.8% | 1.3% |
| Platinum US$/oz. | 946.50 | -5.6% | -8.2% | -2.9% |
| Gold US$/oz. | 2,303.19 | -3.0% | -2.3% | 18.5% |
| Brent US$/oz. | 82.75 | 3.6% | 0.4% | 13.0% |
| SA 10 year bond yield | 10.98 | -4.7% | -3.5% | -2.7% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022/Event | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 5.0 | 1.9 | 0.7 | 1.2 | 1.5 | 1.6 |
| Household consumption expenditure % y/y | 6.2 | 2.5 | 0.7 | 1.4 | 1.3 | 1.5 |
| Gross fixed capital formation % y/y | -0.4 | 4.8 | 3.9 | 4.0 | 4.2 | 3.6 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.1 | 4.7 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.7 | 4.7 | 4.7 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 8.00 | 7.50 | 7.50 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.50 | 11.00 | 11.00 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.40 | 17.70 | 18.30 |
