Economics Weekly
At its March 2023 meeting, the SARB Monetary Policy Committee (MPC) decided to hike the repo rate by 50bps, lifting the magnitude from 25bps previously. This decision was a close call, with three members voting for the 50bps hike and two voting for 25bps. The MPC has hiked interest rates at each of its past nine meetings since November 2021, bringing rates to 7.75%, the highest since April 2009. Ahead of this meeting, the consensus analysts' expectation was that this decision would guide the hiking cycle to its terminal. Naturally, we now ponder on how comfortable we are with this prediction based on the tone of the statement and how the MPC's forecasts and risk assessment have changed.
Global environment
Global growth projections for 2023 have improved relative to the start of the year, rising to 2.0% from 1.6%. However, the environment remains plagued by uncertainty as geopolitical tensions are escalated and financial conditions tighten. Even as idiosyncratic bank balance sheet weaknesses emerge and financial markets remain volatile, interest rates in advanced economies are expected to average slightly higher than previous projections. This is in line with the "higher for longer" theme which caters for a global inflation projection that is slightly lifted and remains higher than pre-pandemic levels over the forecast. The MPC sees real interest rates in advanced economies turning positive next year, these rates then become more restrictive than in 2019.
Furthermore, weaker terms of trade push the current account balance further into deficit territory, increasing our external funding needs and placing upward pressure on local rates.
Local activity
The MPC has downgraded their already weak growth expectation, to 0.2% from 0.3% previously. This reflects the weaker 4Q22 starting point, with average growth in 2022 of 2.0% underwhelming the 2.5% expectation at the January MPC. The monetary authority still notes the impact of energy and logistical constraints as a key impediment to near-term growth. Over the forecast, investment into energy supply and a more supportive external environment should support economic growth. However, this growth is at a modest 1.0% (0.7% previously) in 2024 and 1.1% in 2025 (1.0%). The MPC once again viewed risks to growth to be balanced, potentially supported by traction in key structural reforms and China's recovery, while potentially constrained by a weaker global environment.
Inflation expectations
The MPC raised its headline inflation projection to 6.0% (5.4% previously) in 2023 and 4.9% (4.8%) in 2024, citing the impact of a weaker rand-dollar exchange rate. This impact shows up in the upward adjustment to fuel (-0.6% vs -2.7% previously) and food (9.9% vs 7.3%) inflation. Risks to inflation are again tilted upward as higher global inflation, the lift in SA's cost of doing business, as well as the potential shift to El Nino weather conditions, associated with below-average rainfall, could sustain inflationary pressures and keep expectations above target.
The median inflation projection for 2023, as reflected in the Reuters survey, sits at 5.8%, and that surveyed by Bloomberg at 5.6%. In addition, the BER's 1Q23 surveyed inflation expectations showed that 2023 expectations sit at 6.3% while two-year-ahead expectations, which are focal given the MPC's estimated two-year policy implementation horizon, were a full percentage point above their preferred anchor of 4.5%. These factors warrant that the MPC maintain a hawkish tone, avoiding a perception that the committee is comfortable, and that the road ahead is easy. In fact, besides the high inflation periods in the early 2000s and the GFC period, the post-lockdown period presents the most recent test to the MPC's commitment to anchoring inflation.
So, while we think there is still a high probability that this was the end of the hiking cycle, we cannot override an upside risk, but think this risk is less than earlier in the year. We continue to expect the MPC to remain quite vigilant, eager to do what it takes to uphold their credibility.
Week in review
The Quarterly Employment Statistics (QES) showed that total employment increased by 48 000 (0.5%) q/q in 4Q22, but employment is down by 94 000 (-0.9%) y/y and by 336 000 (-3.3%) when compared to the end of 2019. Quarterly job gains were recorded in trade (49 000), business services (9 000) and mining (2 000). Jobs were shed in construction (-10 000), manufacturing (-1 000) and electricity (-1 000), while transport and community services showed no quarterly changes in employment. Just over half of the jobs created in trade were full-time, while most of those in business services were part-time. Overall, part-time jobs (87.5% of jobs created) dominated the net quarterly gains, in line with seasonal demand during the festive period. Gross earnings increased by 8.5% q/q, 4.7% y/y and are 9.6% higher than they were at the end of 2019. More robust employment creation will be supported by an improvement in business sentiment and economic activity. Further progress in implementing structural reforms, including the alleviation of electricity and logistical constraints, is key. For now, the recovery in employment remains slower than that in earnings, and both will likely be constrained by weaker economic activity this year, as well as the lift in the cost of doing business.
The FNB/BER Civil Confidence Index increased for the fourth consecutive quarter to 42 index points in 1Q23, the highest level in over six years. Underpinning the lift in confidence was improved activity, profitability, and prospects for new work, which relate to investments in renewable energy as well as road and water infrastructure. These factors translated to bolder hiring intentions, with the index measuring expected employment growth lifting to its highest level since 2Q07. Nevertheless, sentiment remained weaker relative to the longer-term average of 46 index points. While the short-term outlook is encouraging (order books recorded the highest rating since 2014), it is still uncertain if these expectations will fully materialise, given broader economic weakness and the public sector's poor track record of delivering on infrastructure projects.
Private Sector Credit Extension (PSCE) growth slowed marginally in February, to 8.3% y/y from 8.4% y/y in January. Corporate credit extension was unchanged at 8.8% y/y, while household credit slowed to 7.6% y/y from 7.9% y/y previously. The growth in corporate credit was predominantly supported by the uptake of mortgages, which accelerated to 7.0% y/y from 6.4% previously, the quickest pace since September 2020. The growth in general loans and advances remained robust at 13.2% y/y while overdraft facilities spiked to 22.5% y/y from 17.5% previously.
Meanwhile, household credit growth moderated in February, primarily due to slower growth in unsecured credit uptake, for the first time in 17 months. Within the unsecured category, general loans grew by 10.0% y/y from 11.0% previously, and overdrafts by 8.1% y/y from 8.6% in January. Meanwhile, credit cards grew by 8.9% y/y, unchanged from the previous month. Within the secured category, instalment sales (predominantly car finance) grew by 7.7% y/y, down from 8.1% previously, while mortgage advances slowed marginally to 6.9% y/y from 7.0% y/y in January.
Demand for private sector credit continues to find support from both corporates and households, as investment into self-generation and load-shedding mitigation measures intensify. Nevertheless, the broader economic weakness and higher borrowing and debt servicing costs could curtail the extent of this upside.
Producer price inflation slowed further to 12.2% y/y in February from 12.7% y/y in January. Monthly producer price pressure was 0.6%, following a 0.6% monthly decline in January. Intermediate producer price inflation, a measure of product prices as they enter the production process, slowed further, reaching 5.0% y/y from 5.6% y/y in January, with a -0.1% monthly decline compared to -1.7% m/m in January. This reflects the continued easing in domestic supply chain pressures as well as a general moderation in raw material prices. The slowing intermediate price inflation should provide some relief for manufacturers, and we maintain our view of a continued moderation in producer inflation, even as monthly pressure regains momentum, supported by the cost of load-shedding and a slightly weaker domestic currency. We expect producer inflation to average around 6.3% this year, from 14.3% in 2022. Part of the moderation will be due to the higher base over the past year, as well as weakening domestic demand.
Week ahead
The Absa manufacturing PMI for March will be released on Monday. The manufacturing PMI declined to 48.8 index points in February, from 53.0 previously. Indices tracking business activity and new sales orders both recorded levels below the 50-index points neutral mark, suggesting a deterioration in factory business conditions. In line with this, the employment and inventories indices also slid lower. Of further concern, expectations for near-term conditions fell to their lowest level since May 2020 when harsh lockdown restrictions were in place. Despite improved global dynamics supporting export sales, the PMI results suggested that worsening domestic electricity shortages are having a more pronounced impact on the manufacturing sector.
Also on Monday, the Naamsa new vehicle sales data for March will be published. New vehicle sales increased by 2.6% y/y, to reach 45 352 units in February. This was down from 6.2% y/y growth in the previous month, but still reflected positive monthly momentum of 2.9%. Naamsa predicts that new vehicle sales will grow by 6.3% this year versus 14% growth in 2022. However, a weaker exchange rate and rising new vehicles inflation, a more cumbersome cost of borrowing, as well as the broader economic weakness, should weigh heavily on vehicle sales.
On Thursday, data on electricity generated and available for distribution for February will be published. Electricity generation declined by 8.0% y/y in January, marking the sixteenth consecutive month of annual decline. Seasonally adjusted electricity generation increased by 1.3% m/m, reflecting a muted rebound from a 5.6% monthly decline in December. The persistent weakness in electricity generation mirrors continued generation capacity challenges at Eskom. Unplanned power plant breakdowns continue to pose the most considerable challenge to the electricity grid, while outages linked to Eskom's planned maintenance continue. YTD, the energy availability factor is around 53%, which is low compared to the corresponding period last year and in 2021.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 28 Mar | SA | Non-farm payroll y/y | 4Q22 | -0,9% | -0,3% |
| SA | Non-farm payroll y/y | 4Q22 | 0,5% | -0,6% | |
| 30 Mar | SA | Private Sector Credit y/y | Feb | 8,3% | 8,4% |
| SA | PPI y/y | Feb | 12.2% | 12.7% | |
| SA | PPI m/m | Feb | 0.6% | -0.6% | |
| SA | SARB interest rate announcement | Mar | 7.75% | 7.25% |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 31 Mar | SA | Trade Balance Rand | Feb | -14.6b | -23.1b |
| 3 April | SA | Absa Manufacturing PMI | Mar | 48,8 | |
| SA | Naamsa Vehicle Sales y/y | Mar | 2,6% | ||
| 5 April | SA | S&P Global South Africa PMI | Mar | 50,5 | |
| 6 April | SA | Electricity Consumption y/y | Feb | -7,3% | |
| SA | Electricity Production y/y | Feb | -8.0% |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 76 704,63 | 1,5% | -1.3% | -1.7% |
| USD/ZAR | 17.82 | -1.5% | -2.9% | 23.1% |
| EUR/ZAR | 19.45 | -0.8% | 0.2% | 20.4% |
| GBP/ZAR | 22.08 | -0.7% | 0.0% | 16.1% |
| Platinum US$/oz | 990.87 | 0.1% | 3.6% | -0.4% |
| Gold US$/oz | 1,980.37 | -0.7% | 8.4% | 2.5% |
| Brent US$/oz | 79.27 | 4.4% | -5.5% | -30.1% |
| SA 10 year bond yield | 9.89 | -0.4% | -2.0% | 3.5% |
FNB SA Economic Forecast
| Economic Indicator | 2020 | 2021 | 2022 | 2023f | 2024f |
|---|---|---|---|---|---|
| Real GDP %y/y | -6.3 | 4.9 | 2.0 | 0.4 | 1.4 |
| Household consumption expenditure % y/y | -5.9 | 5.6 | 2.6 | 1.5 | 1.2 |
| Gross fixed capital formation % y/y | -14.6 | 0.2 | 4.7 | 3.4 | 3.8 |
| CPI (average) %y/y | 3.3 | 4.5 | 6.9 | 5.9 | 5.4 |
| CPI (year end) % y/y | 3.1 | 5.9 | 7.2 | 5.0 | 5.3 |
| Repo rate (year end) %p.a.* | 3.50 | 3.75 | 7.00 | 7.75 | 7.50 |
| Prime (year end) %p.a.* | 7.00 | 7.25 | 10.50 | 11.25 | 11.00 |
| USDZAR (average) | 16.60 | 14.80 | 16.40 | 17.70 | 17.70 |
*Interest rate view will be finalised ahead of the next publication.
