By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Longer-term global growth expectations are hinged on the dynamics that will confront the global economy. These range from less policy cooperation to lower population growth, and climate change. These themes have implications for the global economy's growth potential while maintaining pressure on fiscal policy. They could also produce inflationary pressures that complicate monetary policy. Ultimately, these are a few themes we continue to monitor in determining the likely operating environment and as part of our macroeconomic forecasting process.
Global fracturing
Analysts have repeatedly articulated the issue of reduced policy cooperation amid geopolitical tensions. The globalisation era has arguably stalled since the Global Financial Crisis, with the GDP share of external trade in goods declining. Instead of trade agreements and liberalisation, trade-distorting policy measures against foreign commercial interests have increased. In line with this, and as a ramification of disruptions during the great lockdowns, supply-chain reconfigurations will likely create trade frictions, weighing on growth, lifting risk premia, and adding to inflationary pressures
Political shifts
Less global cooperation is also a reflection of domestic political shifts. While the political gravity remains predominantly centrist, populism has become an important feature in global politics. This year's mega election roster has highlighted a rise in right-wing politics in regions such as the European Union, and the United States election will not be any different. These political leanings stand to compound global fracturing as inward policies and anti-immigration take precedence. We have also seen a rise in redistributive policies aimed at reducing inequality. As a by-product, these policies, along with potential supply-chain recalibration away from cheaper labour, will likely place more income in the hands of labour and generate inflationary pressure.
Falling demographic dividend
While slower population growth is not new in advanced economies, we have also started to witness similar trends in emerging markets such as China. Therefore, and related to the above, falling growth in the supply of labour suggests that the demographic dividend is starting to slow in economies that previously provided cheaper labour. These countries could start to witness a higher cost of labour. More importantly, with less cooperation, advanced economies that have started to rely on the foreign supply of labour could also experience wage pressures - alongside falling demand.
Climate change
Climate mitigation and adaptation will be another source of inflationary pressure, through the impact on soft commodities and carbon-related taxes. It will also be another source of demand for savings. Unfortunately, a lack of cooperation may slow the green transition.
All these factors present important challenges to macroeconomic policy. High public debt may limit the ability of fiscal policy to respond to spending pressures, while adding to monetary policy challenges as it battles heightened inflation risks. Considering this, productivity-enhancing innovations and reforms will be key to mitigating risk premia and strengthening longer-term economic fundamentals
Week in review
Producer inflation moderated further in July reaching 4.2% y/y, down from 4.6% y/y in June. Monthly pressure was -0.2%, reflecting a 4.9% and 1.4% monthly decline in petrol and diesel prices, respectively, as well as a 0.1% monthly decline in food products. Excluding petroleum-related products, producer inflation was even lower at 3.7% y/y, down from 4.0%, with food inflation at 3.3% and transport equipment experiencing 0.9% deflation. Intermediate producer inflation, which measures the prices of raw materials as they enter the production process, rose to 4.2% y/y in July from 2.3% in June, largely due to last year's low base. The impact of these unfavourable base effects is expected to persist over the next few months, potentially lifting annual intermediate producer inflation further. Overall, we anticipate a continued moderation in producer inflation, supported by a less depreciated rand, stable oil prices, and statistical base effects.
Private Sector Credit Extension (PSCE) growth moderated to 3.5% y/y in July, down from 4.3% y/y in June. This slowdown was primarily driven by a deceleration in corporate credit growth, which eased to 3.7% from 5.1% y/y. Household credit growth also moderated slightly, from 3.3% to 3.2% y/y over the same period. Adjusted for inflation, PSCE growth has been contracting, on average, by 1.2% since August 2023, underscoring unfavourable demand-supply dynamics amid high borrowing costs and tightened credit conditions.
Within corporate credit, the decline has been most pronounced in general loans and advances (which constitute about 45% of corporate credit), moderating to 4.3% year-to-date (YTD) compared to 10.1% over the corresponding period last year. Corporate mortgage advances have also slowed, with growth decreasing to 3.4% from 5.7%, while overdrafts have contracted by 0.1%, a stark contrast to the 17.8% growth observed over the same period last year. Interestingly, corporate vehicle asset finance remains robust, growing by 13.3% YTD, compared to 12.0% over the same period last year.
In the household credit segment, the slowdown is evident across unsecured and secured credit lines. Unsecured credit growth has dropped to 3.1% YTD, down from 7.8% last year. Secured credit growth has also slowed to 3.8% from 6.9%, mainly due to an accelerated moderation in household mortgage advances.
Week ahead
On Monday, the manufacturing PMI for August will be released. The PMI jumped from 45.7 index points in June to 52.4 points in July, signalling a solid rebound in both domestic and external demand. Business activity surged by 14.5 points to 50.8, while new sales orders soared by 17.5 points to 55.4, both entering expansionary territory. This suggests that the demand that had been put off because of policy uncertainty is now supporting the market and is compounded by export sales. Furthermore, purchasing prices continued to ease, partly reflective of lower fuel prices. However, supplier delivery times are worsening, suggesting that supplier ability to manage rising demand is limited. This could stifle performance going forward, as optimism on near-term conditions continues to rise.
Also on Monday, new vehicle sales data for August will be released. In July, new vehicle sales (volumes) increased by 1.5% y/y, or by 657 units to record 44 229 units, breaking an eleven-month streak of declines. This outcome was driven by passenger vehicle sales, which rose by 6.8% y/y, while total new commercial vehicle sales declined by 8.0% y/y. It is still too early to determine if the July increase signals the start of an upward trend in vehicle sales, especially given the significant pressures faced by households. We believe this increase was partially due to base effects related to the severe load-shedding experienced in July 2023, but also supported by increased sales to the rental industry, which boosted performance in the reference month. However, the cessation of load-shedding, continued launches of new products, the ongoing disinflation trend, and anticipated monetary policy easing should eventually support participation in the new vehicle market.
On Tuesday, GDP data for 2Q24 will be released. In 1Q24, GDP contracted by 0.1% q/q, partially reversing the 0.3% expansion observed in 4Q23. The weakness in 1Q24 was broad-based, with six out of ten sectors contracting. Despite mixed high-frequency data during 2Q24, we maintain our view that the economy rebounded. We estimate GDP growth of between 0.2% and 0.4% q/q (seasonally adjusted), supported by increased activity in the manufacturing, trade, and utilities sectors. Although notoriously volatile, the agricultural sector likely contributed positively to economic growth, driven by increased activity in horticulture and, to some extent, field crops. The high interest rate environment continues to support the financial services sector, albeit to a lesser extent due to significant constraints on consumers. Overall, economic growth likely remained subdued in 1H24, expanding by 0.4% compared the corresponding period last year, based on our 0.3% y/y (not seasonally adjusted) estimate for 2Q24.
On Wednesday, the RMB/BER Business Confidence Index (BCI) for 3Q24 will be published. The BCI showed a slight improvement in business sentiment in 2Q24, with about a third of businesses satisfied with conditions (35, up from 30 in 1Q24). Importantly, businesses were surveyed from 9 to 27 May 2024, just before the national elections. The improvement was relatively broad-based, permeating across four out of five sectors covered by the survey. There were two key features at play in the BCI outcome. First, the election uncertainty: businesses might have been cautious and waiting to see the election outcome before making decisions, which had the impact of holding back domestic demand. Second, the improved power supply: the suspension of load-shedding for over a month at the time likely had a positive impact. Based on this, we could see a further lift in confidence.
On Thursday, data on the current account for 2Q24 will be released. In 1Q24, the current account deficit narrowed significantly to R84.6 billion, down from R162.9 billion in 4Q23. As a percentage of GDP, the deficit improved to 1.2%, compared to 2.3% previously. This improvement was largely driven by a widening trade surplus on goods, which increased from 1.3% of GDP to 2.6%. Total export values rose slightly, reflecting higher prices, while import values declined due to lower volumes. The monthly trade data (not seasonally adjusted) suggests that the trade surplus was maintained, and possibly even expanded, in 2Q24, which should help limit the extent of any widening in the current account deficit.
Also on Thursday, data on electricity generated and available for distribution for July will be released. In June, electricity production expanded by 5.4% y/y, following a 5.5% expansion in May. Seasonally adjusted electricity production also increased by 2.3% m/m, fully reversing the 0.5% decline observed in the previous month. Growth in electricity production is likely to have been sustained in July, given the average decline in unplanned breakdowns and an improvement in the energy availability factor.
On Friday, data on SA's foreign exchange reserves for August will be published. In July, foreign exchange reserves increased to $62.3 billion from $62.1 billion in June. The increase was supported by higher gold reserves and SDR holdings, while foreign exchange reserves declined. Foreign exchange payments were made on behalf of government, including a partial repayment of a loan from the International Monetary Fund.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 29 Aug | SA | PPI % m/m | Jul | -0.2 | -0.3 |
| 29 Aug | SA | PPI % y/y | Jul | 4.2 | 4.6 |
| 30 Aug | SA | Private Sector Credit Extension % y/y | Jul | 3.5 | 4.3 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 2 Sep | SA | Absa Manufacturing PMI | Aug | -- | 52.4 |
| SA | Naamsa Vehicle Sales % y/y | Aug | -- | 1.5 | |
| 3 Sep | SA | GDP s.a. % q/q | 2Q24 | 0.4 | -0.1 |
| SA | GDP % y/y | 2Q24 | -- | 0.5 | |
| 4 Sep | SA | BER Business Confidence | 3Q24 | -- | 35 |
| 5 Sep | SA | Current Account Balance R bn | 2Q24 | -- | -84.6 |
| SA | Current Account % of GDP | 2Q24 | -- | -1.2 | |
| SA | Electricity Production % y/y | Jul | -- | 5.4 | |
| 6 Sep | SA | Foreign exchange reserves $ bn | Aug | -- | 62.3 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 84,239.42 | 0.7% | 4.0% | 12.7% |
| USD/ZAR | 17.74 | -1.5% | -3.8% | -4.0% |
| EUR/ZAR | 19.26 | -3.7% | -3.5% | -4.2% |
| GBP/ZAR | 23.38 | -0.8% | -1.4% | 0.1% |
| Platinum US$/oz. | 942.00 | -0.8% | -1.1% | -4.1% |
| Gold US$/oz. | 2,521.40 | 1.5% | 5.8% | 30.1% |
| Brent US$/oz. | 79.94 | 3.5% | 0.2% | -6.5% |
| SA 10 year bond yield | 9.85 | -0.5% | -3.9% | -9.9% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 5.0 | 1.9 | 0.7 | 0.9 | 1.7 | 1.8 |
| Household consumption expenditure % y/y | 6.2 | 2.5 | 0.7 | 0.8 | 1.8 | 1.8 |
| Gross fixed capital formation % y/y | -0.4 | 4.8 | 3.9 | 1.2 | 4.8 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 4.9 | 4.4 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.5 | 4.4 | 4.6 |
| 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 | 17.60 | 18.30 |
