A disjointed global economy
The global economy has depicted a bumpy recovery since the pandemic lockdowns. While the GDP recovery to 2019 levels was speedy in countries such as Brazil, India and the US, countries such as Japan and the United Kingdom have lagged. Monetary policy is slowly reining-in inflation, which was largely driven by demand-supply misalignment and perpetuated by country-specific factors. However, tighter financial conditions have also revealed fiscal policy cracks. After the support provided to ease the impact of the lockdowns and cost-of-living crisis, fiscal policy has unwound wide-ranging support, but ripple-effects linger. In most countries, debt burdens and servicing costs have worsened, and will be exacerbated by rising neutral interest rates during an era of heightened risk.
Advanced economies have broadly depicted strong labour markets, with demand for labour outpacing supply, as post-pandemic frictions loom. This has allowed for robust wage growth and fears of significant passthrough to inflation. Furthermore, household balance sheets have been stronger following excess savings accumulated during lockdowns, resulting in resilient spending despite higher interest rates. However, excess savings have been depleted in the US and are falling in other advanced economies. This should result in a less robust household sector in the US, while households in other advanced economies take a more cautious approach to spending as inflation remains elevated and energy cost risks re-emerge. Interest rates are now at the highest level since the Global Financial Crisis (GFC), which will weigh on aggregate demand, and ultimately filter through to emerging markets. Furthermore, the demand for savings to fund investments into Artificial Intelligence (AI) and new production hubs1, as firms mitigate geopolitical and demographical risks, should drive neutral interest rates higher.
This suggests a period of expensive funding for developing economies that have deteriorated fiscal positions over the past decade.2 Tighter global financial conditions have pushed countries such as Ghana, Zambia, and Sri Lanka into external debt default, precipitating restructure deals. In addition, weaker global growth, climate challenges and external trade restrictions have lifted food insecurity and should lift current account imbalances. Therefore, protracted geopolitical tensions should weigh more distinctively on the access to funds and goods by these economies, compounding the ill-preparedness for the eventual shift away from several raw materials that are not consistent with clean energy ideals.
Bringing it closer to home, Sub-Saharan Africa has entered an El Nino phase which is associated with below-average rainfall. While a single phase should generally not have a severe impact on agricultural and hydroelectric produce, a prolonged event could have adverse spillovers to trade, fiscal revenues, and inflation - exposing countries such as Eswatini, which has inadequate reserves and high exposure to SACU performance. Investment in energy supply and human capital is much needed in the region, to spur economic growth and reduce operating costs. However, political risks and policy uncertainty remains elevated. This has generally lifted risk premia, making it difficult to attract foreign investment during periods of risk aversion.
The world is not quite what it was after lockdowns, and much of the economic weaknesses linger. Unfortunately, developing nations generally have limited buffers for these kinds of shocks, raising macroeconomic imbalances that require stronger policy actions to unwind. What is supposed to be a recovery has revealed fundamental cracks which will not be easily fixed in the face of shorter and more amplified economic cycles, characterised by seismic shifts in global trade and investments. Ultimately, there is no better time for structural reform and stronger insulation of future economic performance.
Week in review
Private sector credit extension (PSCE) growth eased to 5.9% y/y in July, from 6.3% in June. The slowdown reflected a moderation in both corporate and household credit. Corporate credit growth slowed to 5.7% from 6.1% previously, dragged down by slower mortgage extensions (5.8% from 6.1%), general loans (5.4 from 7.9% %), as well as overdrafts (10.9% from 11.8%). Support came from instalment sales, which quickened to 15.5% from 15.1% previously, as well as investments, which rebounded to 0.2% from a contraction of 5.6% in June.
Credit extended to households slowed to 6.1% in July, from 6.5% previously. Both asset-backed and unsecured credit eased during the month. Within asset-backed credit, housing finance slowed to 5.3% from 5.8% in June, reflecting slower buying activity. Instalment credit, predominantly vehicle finance, remained steady at 6.3%. Within unsecured components, overdrafts quickened to 3.3% from 2.2% in the previous month, while loans and advances posted 6.4% from 7.3%. Credit cards, which have outperformed in recent months, remained robust at 9.0%, marginally lower than 9.2% in June. We expect PSCE to continue slowing, as the impact of interest rate hikes filters through, and lending standards tighten.
Producer inflation slowed to 2.7% y/y in July from 4.8% y/y in June, underscoring favourable base effects from last year. The outturn was below our and Reuters consensus prediction of a moderation to 3.5% y/y. Producer prices grew at a slow pace of 0.2% m/m after declining by 0.3% in June. Excluding petroleum-related prices, producer inflation measured 6.8% y/y, reflecting a moderation from 7.5% y/y in June. For the first time since December 2019, intermediate producer prices declined by 0.1% y/y after expanding by 2.4% y/y in June, continuing the moderation from a peak of 23.1% y/y in November 2023. This is consistent with improved supply-chains and should provide cost-pressure relief for manufacturers.
The nominal trade balance (not seasonally adjusted) recorded a surplus of R15.96 billion in July following a downwardly revised deficit of R4.75 billion (previously R3.54 billion) in June. This reflected export growth of 4.6% m/m to R174.0 billion, while imports contracted by 7.6% m/m to R158.0 billion. The Y TD (January - June) cumulative trade balance measured a surplus of R19.5 billion, reflecting a significant compression from the cumulative trade surplus of R154.6 billion recorded over the corresponding period last year. This is consistent with the ongoing deterioration in terms of trade amid falling prices for South Africa's major export commodities.
Week ahead
On Tuesday, GDP data for 2Q23 will be released. In 1Q23 GDP grew by 0.4% q/q seasonally adjusted and 0.2% y/y non-seasonally adjusted. This reflected broad-based expansion with eight out of 10 sectors posting growth despite intensified load-shedding. We expect GDP to have continued expanding in 2Q23, albeit at a moderate pace of 0.1% q/q, underpinned by continued growth momentum in the mining and manufacturing sectors. This is aligned with the Reuters consensus prediction published in August. GDP is likely to have accelerated to around 1.1% y/y in 2Q23. Generally, GDP growth is likely to surprise on the upside if the agricultural and financial intermediation, real estate, and business services sectors perform better than we estimate.
On Wednesday, the RMB/BER business confidence index for 3Q23 will be published. Business confidence plummeted to 27 index points in 2Q23, from 36 points in 1Q23. At this level, sentiment was at its lowest since the strictest lockdown restrictions at the height of the Covid-19 pandemic in 2020. The decline was largely among trade-related sectors, reflecting increased pressure on profitability, hard power cuts, higher interest rates, as well as weakening domestic demand. The persistence of some of these headwinds will likely keep business confidence depressed, and in turn, continue to curtail broad-based private sector fixed investment required for employment creation.
On Thursday, data on SA's foreign exchange reserves for August will be released. SA's gross foreign exchange reserves increased to $62.21 billion in July, from $61.55 billion in June. The increase reflected a higher dollar-denominated gold price as well as valuation adjustments given foreign currency and asset price changes. These were mitigated by government-related foreign exchange payments.
Also on Thursday, the current account balance for 2Q23 will be published. The current account deficit narrowed from R155.3 billion in 4Q22 to R66.2 billion in 1Q23. As a percentage of GDP, the current account deficit was -1.0% in 1Q23, compared to -2.3% recorded in 4Q22. The quarterly improvement in the current account reflected the benefits of higher terms of trade as well as a smaller deficit on the services account. Nevertheless, the deficit in the first quarter is still higher than the -0.5% average over 2022, and expectations are for higher external vulnerabilities this year - highlighting the impact of intensified load-shedding, logistical constraints, and weaker export commodity prices. Meanwhile, domestic demand related to alternative sources of energy should support import volumes.
Data on electricity generated and available for distribution for July will also be released on Thursday. Electricity production (not seasonally adjusted) declined by 3.7% y/y in June, slower than -8.7% in May, 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, while seasonally adjusted consumption was up by 3.4% m/m. Y TD (January - June) electricity consumption was 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) was 54.5% Y TD, well below the target of 70%.
Last on Thursday, the FNB/BER consumer confidence index for 3Q23 will be published. Consumer confidence slipped further to -25 index points in 2Q23, after plunging to -23 points in 1Q23 from -8 points in 4Q22. This reading was the second lowest since 1994 and suggests mounting consumer concerns regarding economic prospects and their finances. This was more pronounced for higher-income households, those with stronger balance sheets and greater spending power, likely reflecting concerns around electricity shortages and SA's foreign relations, amongst other things. .
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 30 Aug | SA | Private Sector Credit %y/y | Jul | 5.9% | 6.3% |
| 31 Aug | SA | PPI %m/m | Jul | 0.2% | -0.3% |
| SA | PPI %y/y | Jul | 2.7% | 4.8% | |
| SA | Trade Balance Rbillion | Jul | 16.0 | -4.8 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 5 Sep | SA | GDP s.a. q/q | 2Q | 0.2% | 0.4% |
| SA | GDP y/y | 2Q | 0.9% | 0.2% | |
| 6 Sep | SA | Business Confidence | 3Q | -- | 27.0 |
| 7 Sep | SA | Gross Reserves $billion | Aug | -- | 62.2 |
| SA | Consumer Confidence | 3Q | -- | -25.0 | |
| SA | Current Account Balance Rbillion | 2Q | -114 | -66.2 | |
| SA | Current Account as a % GDP | 2Q | -2.4% | -1.0% | |
| SA | Electricity Consumption y/y | Jul | -- | -3.2% | |
| SA | Electricity Production y/y | Jul | -- | -3.7% |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 74,953.73 | 0.9% | -5.1% | 11.4% |
| USD/ZAR | 18.88 | 0.3% | 5.8% | 10.3% |
| EUR/ZAR | 20.47 | 0.6% | 4.3% | 19.0% |
| GBP/ZAR | 23.92 | 0.9% | 4.3% | 20.2% |
| Platinum US$/oz | 971.89 | 3.6% | 1.8% | 14.5% |
| Gold US$/oz | 1,940.19 | 1.2% | -1.3% | 13.4% |
| Brent US$/oz | 86.86 | 4.2% | 1.5% | -10.0% |
| SA 10 year bond yield | 10.25 | 0.5% | 0.5% | -1.7% |
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 | 5.9 | 5.0 | 4.8 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.0 | 4.7 | 4.9 |
| 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 | 18.40 | 18.00 | 17.50 |
