Economics weekly
By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
This week, the domestic economic calendar was packed with key data releases. It followed a week of peaceful elections on 29 May and the official announcement of the election outcome by the Independent Electoral Commission (IEC) on 2 June. With the African National Congress (ANC) failing to gain an outright majority for the first time since 1994, the political landscape has sparked intense political horse-trading. Yesterday, President Cyril Ramaphosa announced the outcome of the ANC National Executive Committee (NEC) discussions, stating that the ANC invites parties to form an inclusive and consensus-driven government, i.e., a government of national unity to move the country forward. The president indicated that the ANC task team has already had preliminary constructive engagements with the DA, EFF, IFP, NFP, and PA. He emphasised that the primary goals of this government must be to address job creation and inclusive growth, the high cost of living, service delivery, and the issues of crime and corruption. Both markets and society will likely take a constructive view of this option.
We will be ready, if necessary, to review our macroeconomic projections once the invited political parties have agreed on the government of national unity for the new administration. In the meantime, we delve into the key economic indicators of the week, with a particular focus on business confidence and private sector fixed investment
The GDP data for the first quarter, detailed here , revealed sluggish economic activity, with six out of ten sectors contracting. While aligned with our expectations, the 13.5% quarterly rebound in agriculture fell short of our point forecast. As a result, the 0.1% quarterly decline in GDP was below our projection of a mild 0.1% expansion. All demand components experienced a quarterly contraction, with total fixed investment remaining in a technical recession for the third consecutive quarter. Government consumption also entered a mild technical recession, and household consumption contracted by 0.3% q/q, reflecting the ongoing cost-of-living pressures. Compared to last year, household consumption spending declined by 0.4%, and compensation of employees fell by 1.6% when adjusted for inflation.
Later in the week, survey results of the BER Business Confidence Index, conducted in May
Week in review
The Absa manufacturing PMI relapsed to below the neutral 50-mark in May, registering 43.8 points from 54 in April. A key reason for the decline appears to be a sharp fall in customer demand, driven by delayed placing of orders as customers were waiting to see the outcome of the election. As such, new sales orders declined to 37.8 points in May from 55.6 points in April, and the business activity index declined to 38.1 from 57.2 points. Positively, the index for expected business conditions in six months' time increased to 57.6 from 55.7 in April, likely fuelled by hopes for a favourable election outcome and a return of "put-on-hold" orders, as well as the more upbeat expectations of a global economic recovery, particularly in Europe. That said, it is telling that the PMI has been in negative territory for most of this year, suggesting an unstable manufacturing sector during this election year.
New vehicle sales fell by 6 137 units or 14.2% y/y to 37 105 units in May. This suggests that the uptick that was recorded in April was temporary. Passenger car sales registered a decrease of 11.7% y/y, light commercial vehicles fell by 19.5% y/y, medium commercial vehicles by 7.3% y/y, while heavy trucks and busses posted -17.1% y/y. Cost-of-living pressures coupled with political uncertainty are likely to keep activity in the new vehicle market subdued. Once these unwind and the investment climate improves, broader sentiment and purchases of big-ticket items should recover.
The RMB/BER Business Confidence Index (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. Notably, wholesalers led the charge, with 53 points from 37 previously, supported by building contractors with 47 points, up from 42. New vehicle dealers, however, saw their sentiment decline from 16 to 10, the lowest across all sectors, likely reeling from the high interest rate and low demand environment. Overall, there were two key features at play in the recent 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. That said, it is too early to say if this confidence boost will last. The implications of the new government arrangement and the long-term power supply situation remain unclear.
The current account deficit narrowed materially to R84.6 billion in 1Q24 from R162.9 billion (revised from R165.5 billion) in 4Q23. As a percentage of GDP, the current account deficit was 1.2%, compared to 2.3% previously. This improvement was supported by a widening in the trade surplus on goods, from 1.3% of GDP to 2.6%. Total export values increased slightly, reflecting higher prices, while import values declined, reflecting lower volumes. The services, income, and current transfers balance worsened, from 3.6% of GDP to 3.7%, as the balance on the income account deteriorated while that on services improved. An improvement in terms of trade, especially if lower oil prices persist, should support the current account in the near term. Nevertheless, consensus expectations are for a widening current account deficit over the forecast period.
Electricity production (not seasonally adjusted) lifted by 5.7% y/y in April after stagnating at 0.0% previously. On a seasonally adjusted basis, electricity production increased by 1.2% m/m after falling by 0.1% in March. Consumption increased by 6.2% y/y, from -0.7% previously, and monthly momentum of 1.8% was recorded, versus -0.7% in March. The lift in the Energy Availability Factor, and the related suspension of load-shedding over the past two months, should support improvement in the sector's outcomes in 2Q24. While near-term risk from rising demand over the winter months remains, we are optimistic that more private sector capacity coming online over the medium term will result in the sector being more consistently supportive of economic growth.
Gross foreign exchange reserves amounted to $62.1 billion in May, an increase from $61.8 billion in April. Gold reserves increased by $129 million to $9.4 billion, supported by a higher gold price. Foreign exchange reserves (including Special Drawing Rights holdings) increased by $163 million to $58.6 billion. These increases were partially offset by the foreign exchange payments made on behalf of the government.
Week ahead
The week will kick off with the FNB/BER Building Confidence Index results for 2Q24 on Monday, which will provide further clues about the mindset of firms, specifically in the building value chain, just before the national elections. In 1Q24, the index plunged by 16 points to reach 27, the lowest level since 1Q21 when the country was under Covid-19 lockdown restrictions. The souring sentiment in 1Q24 followed two quarters of confidence gains, which aroused hopes that a sustained uptrend may have been on the cards for the building sector. The 1Q24 outcomes dented those hopes, more so because four out of the six sub-sectors saw a substantial decline due to insufficient demand, inadequate access to skilled labour, as well disruptions related to water and electricity availability.
On Tuesday, manufacturing production for April will be released. Manufacturing production declined sharply by 6.4% y/y in March, reflecting a material deterioration from the 4.0% expansion in February. In 1Q24, this sector fell by 1.4%, dragging GDP growth and reflecting quarterly declines in five out of ten manufacturing divisions. After falling by 2.2% m/m in March, we expect output to have recovered at the start of the second quarter, consistent with the increase in the manufacturing PMI business activity.
The release of mining production for April will also follow on Thursday. Mining output declined by 5.8% y/y in March and 5.0% m/m. As a result, the mining sector's gross value added fell by 2.3% q/q in 1Q24, also dragging GDP growth, as ten out of twelve mining divisions experienced Figure 10: Mining production a quarterly contraction.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 3 Jun | SA | Manufacturing PMI | May | 43.8 | 54.0 |
| SA | Naamsa vehicle sales % y/y | May | -14.2 | 1.9 | |
| 4 Jun | SA | GDP % y/y | 1Q | 0.5 | 1.3 |
| SA | GDP seasonally adjusted % q/q | 1Q | -0.1 | 0.3 | |
| 5 Jun | SA | BER Business confidence | 2Q | 35 | 30 |
| 6 Jun | SA | Current account balance R billion | 1Q | -84.6 | -162.9 |
| SA | Current account % of GDP | 1Q | -1.2 | -2.3 | |
| SA | Electricity production % y/y | Apr | 5.7 | 0.0 | |
| SA | Gross foreign reserves $ billion | May | 62.1 | 61.8 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 10 Jun | SA | FNB/BER Building Confidence Index | 2Q | - | 27 |
| 11 Jun | SA | Manufacturing production % m/m | Apr | - | -2.2 |
| SA | Manufacturing production % y/y | Apr | - | -6.4 | |
| SA | Mining production % m/m | Apr | - | -5.0 | |
| SA | Mining production % y/y | Apr | - | -5.8 |
Financial market indicators
| Indicator | Level | 1W/Event | 1W | 1Y |
|---|---|---|---|---|
| All Share | 77,123.64 | 0.0% | 0.3% | 0.0% |
| USD/ZAR | 18.96 | 1.2% | 2.4% | -0.6% |
| EUR/ZAR | 20.63 | 1.7% | 3.7% | 1.0% |
| GBP/ZAR | 24.28 | 1.7% | 5.0% | 2.2% |
| Platinum US$/oz. | 1,002.75 | -2.1% | 2.7% | -1.5% |
| Gold US$/oz. | 2,375.61 | 1.4% | 2.7% | 22.5% |
| Brent US$/oz. | 79.87 | -2.4% | -4.0% | 3.8% |
| SA 10 year bond yield | 11.52 | 1.0% | 1.9% | 0.1% |
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 |