MPC decision: A hawkish hold
As expected, the Monetary Policy Committee (MPC) left interest rates unchanged at the September meeting. However, upside risks prevail as inflation is set to persist and funding vulnerabilities heighten. Under these circumstances, a steady MPC should come as a sigh of relief to debt holders as the three-two vote split that avoided a 25bps increase highlights how close we were to another rate hike. The MPC reiterated that policy is restrictive and will likely maintain this stance, with a bout of less restriction as inflation edges higher in the next few months, until data affirms that they will be successful in ensuring price stability within the two-year policy horizon. This is key to their credibility.
The MPC lifted its GDP growth forecast (from 0.4% to 0.7%) in line with better-than-expected 2Q23 GDP data, which indicated the resilience of the productive side of the economy despite ongoing structural constraints. Furthermore, spending by economic agents has maintained growth in inflation-adjusted terms and investment growth has held up. Stronger GDP has tilted the output gap to a slight positive, which may suggest that the impact of policy on aggregate growth is not expected to be dismal, likely because private-sector investment and potential participation in key network industries can counter the cyclical impact of tight policy.
The outcomes on headline inflation were better than what the MPC expected at the previous meeting, and 3Q23 forecasts have been adjusted down from 5.4% to 5.1%. While this has pushed the annual prediction down (from 6.0% to 5.9%) and assisted the softening in inflation expectations, the latter remains higher than the MPC's preferred anchor. Furthermore, rising fuel costs and still-elevated food inflation could spill over to expected wage growth, but so far, the projected rise in wages remains limited and only a shallow lift in real wage growth is predicted for 2024. This is likely reflective of how weak economic growth and elevated operating costs due to load-shedding and logistic issues should constrain bargaining power, especially with more goods being transported by road, broadening the exposure to rising diesel costs.
Additionally, a deeper current account deficit and weaker fiscal dynamics should weigh on the rand and apply pressure to imported inflation. This, along with some attempts at margin rebuilding, should keep core goods inflation elevated, unlike services inflation which provides a stronger reflection of consumer constraints. Overall, the forecast for demand-driven inflation has been reduced for the next year. However, supply-side pressures have resulted in a slightly higher headline forecast for 2024, indicating persistence on that measure. The MPC views risks to inflation to be on the upside and besides energy costs, the committee is worried about adverse weather patterns, but noted that food inflation could become problematic in the latter part of 2024. This aligns with our view that if the prevailing El Nino phase lasts for a single season, it will likely not have a severe impact on agricultural produce, given a good build-up of soil moisture and dam replenishment over the prolonged La Nina phase that we have recently come out of. Therefore, only a prolonged El Nino coupled with the cyclical nature of food inflation, could present upside risk. Over the medium to longer term, a generally adverse climate and escalated geopolitical tensions are the main drivers of upside risk.
At their September meeting, the Fed lifted GDP growth forecasts and unemployment projections were lowered - highlighting economic resilience and upside risks to interest rates. This, together with a higher demand for savings in the context of productivity enhancements, a re-calibration of supply chains, and less supply of cheap labour, should push neutral interest rates up. Ultimately, funding costs should remain elevated, therefore, expect higher rates for longer.
Week in review
Consumer inflation edged up to 4.8% y/y in August, from 4.7% in July, and recorded monthly pressure of 0.3% driven by core inflation. Core inflation was also 4.8% y/y and 0.3% m/m, reflecting the impact of additional municipal tariff increases following the July survey. Electricity inflation also lifted and is now in line with the Nersa guideline for municipalities of 15.1%. Fuel inflation was 2.2% m/m, but still in deflation compared to a year ago. Food and non-alcoholic beverages continued softening to 8.0%, from 9.9% previously. We anticipate headline inflation to continue rising in September, by 0.7% m/m and 5.5% y/y, given the persistence in fuel price hikes, while also reflecting the broader impact of an undervalued exchange rate. Restricting the full passthrough of these cost pressures will be slower consumer spending amid tightened monetary policy and real wage compression. Overall, headline inflation should average around 6% this year, with the disinflation trend over the near term showing some volatility.
Retail sales volumes (not seasonally adjusted) extended annual weakness, declining by 1.8% in July, marking seven successive months of decline this year. Seasonally adjusted sales were flat (0.0% m/m), following muted growth of 0.3% m/m in June. YTD (January to July) retail sales volumes are down by 2.1% y/y, reflecting a deterioration from the 3.0% growth over the corresponding period last year. The YTD poor growth performance is broad-based across six out of seven retail outlets. General dealers' sales are down 3.4%; sales of food, beverages and tobacco in specialised stores are down by 4.1%; pharmaceutical and medical goods, cosmetics and toiletries are down by 2.6%; household furniture, appliances and equipment sales are down by 1.5%; hardware, paint and glass sales are down by 5.2%; and “all other retail” sales are down by 2.4%. Meanwhile, textiles, clothing, footwear, and leather goods sales are up 4.2% YTD. The weak performance in retail sales is consistent with the impact of higher-living- cost pressures, with elevated inflation and higher interest rates weighing heavily on consumers' purchasing power. Various economic sectors have kept wage growth limited, with aggregate compensation of employees having expanded by 4.7% in the 1H23, below inflation.
Week ahead
The leading business cycle indicator for July will be released on Tuesday. The leading business cycle indicator declined slightly by 0.1% m/m in June after declining by 1.7% in May. Three out of the nine constituent variables declined, outweighing the increases in other variables. The decline in the US dollar-denominated export commodity price index and the narrowing of the interest rate spread contributed the most to the marginal fall in the indicator. The leading indicator contracted by 10.6% compared to a year earlier, marking fifteen consecutive months of annual decline. The continued weakness in the leading indicator corroborates our assessment of a high likelihood of subdued near-term economic growth outcomes. Our GDP growth forecast is 0.7% for this year, reflecting a significant moderation from the post-pandemic growth rebound of 4.7% in 2021 and 1.9% in 2022.
The FNB/BER Civil Confidence Index for 3Q23 will be published on Wednesday. After improving for the last year, the Civil Confidence Index edged one index point lower to 41 in 2Q23. This is still in line with the long-term average for the series of 42. While sentiment moved sideways, the pace of the recovery in civil construction activity quickened in 2Q23, with the index measuring activity growth reaching its highest since 2007. Part of this is due to increased public sector projects related to road and water infrastructure, as well as the development of alternative energy infrastructure by the private sector. Disappointingly, overall profitability worsened, weighed on by factors such as increased input costs and continued margin pressure, which is not uncommon so early in a recovery. Overall, broader concerns about impediments to economic activity, a weaker rand, and diplomatic missteps likely contributed to the relatively subdued sentiment, given notably better activity. Importantly, the survey indicates that construction work will remain well supported into the following quarter.
On Thursday, the Quarterly Employment Statistics (QES) for 2Q23 will be published. Employment in the formal non-agricultural sectors of the economy contracted by 21 000 jobs or -0.2% q/q in 1Q23. Many of the jobs that were shed were in trade, in line with post-festive season layoffs. Relative to a year ago, employment has fallen by 97 000 jobs or -1.0%, reflecting a weakening economy. Furthermore, the recovery in employment remains incomplete, with employment still lower by 259 000, or 2.5% compared to 1Q19. Total gross earnings declined by 4.0% q/q but are 5.5% higher than a year ago and have firmly surpassed 1Q19 levels by 18.6%. Sticky inflation and tighter financial conditions should slow global activity this year. This, along with local energy and logistical constraints, are likely to impede employment prospects. Furthermore, the lift in the local cost of doing business should weigh on profitability and wage bargaining. While the recovery in earnings has outpaced that in employment, these headwinds should constrain growth in both measures in the near term. Over the longer term, continued investment in alleviating productivity constraints should usher in more robust economic growth and support more broad-based and inclusive employment growth.
Producer inflation data for August will also be released on Thursday. In July, production inflation slowed to 2.7% y/y from 4.8% y/y in June, underscoring favourable base effects from last year. 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. We expect annual production inflation to have lifted to around 3.9% in August, with monthly pressure of around 0.5%, reflecting a slowdown in the rate of annual decline in petroleum-rated product prices.
Data on private sector credit extension (PSCE) for August will be released on Friday. 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, general loans, as well as overdrafts. Meanwhile, some support came from instalment sales as well as investments. 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 reflected slower buying activity, while instalment credit, predominantly vehicle finance, remained steady. Within unsecured components, overdrafts quickened while credit cards remained robust, and loans and advances fell. We expect PSCE to continue slowing, as the impact of interest rate hikes filters through, and lending standards tighten.
Also on Friday, the trade balance for August will be published. The nominal trade balance (not seasonally adjusted) measured a surplus of R15.96 billion in July, reflecting a rebound from a deficit of R4.75 billion in the prior month. This reflected monthly export growth of 4.6% to R174.0 billion, while imports shrank by 7.6% m/m to R158.0 billion. Nevertheless, the cumulative trade balance was relatively subdued at a surplus of R19.5 billion, reflecting a material 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.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 20 Sep | SA | CPI % m/m | Aug | 0.3 | 0.9 |
| SA | CPI % y/y | Aug | 4.8 | 4.7 | |
| SA | CPI core % m/m | Aug | 0.3 | 0.5 | |
| SA | CPI core % y/y | Aug | 4.8 | 4.7 | |
| SA | Retail sales % m/m | Jul | 0.0 | 0.3 | |
| SA | Retail sales % y/y | Jul | -1.8 | -1.8 | |
| 21 Sep | SA | SARB repo rate (%) | Sep MPC | 8.25 | 8.25 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 26 Sep | SA | Leading indicator | Jul | --v | 108.3 |
| 28 Sep | SA | PPI % m/m | Aug | -- | 0.2 |
| SA | PPI % y/y | Aug | -- | 2.7 | |
| SA | Non-farm Payrolls % q/q | 2Q | -- | -0.2 | |
| SA | Non-farm Payrolls % y/y | 2Q | -- | -1.0 | |
| 29 Sep | SA | Money Supply M3 % y/y | Aug | -- | 9.3 |
| SA | Private Sector Credit % y/y | Aug | -- | 5.9 | |
| SA | Trade balance R billion | Aug | -- | 15.96 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 73,238.11 | -1.5% | -0.7% | 10.6% |
| USD/ZAR | 18.95 | -0.3% | -0.1% | 6.8% |
| EUR/ZAR | 20.20 | -0.2% | -2.2% | 15.8% |
| GBP/ZAR | 23.31 | -1.3% | -3.7% | 16.6% |
| Platinum US$/oz | 922.01 | 1.1% | 0.7% | 1.2% |
| Gold US$/oz | 1,920.02 | 0.5% | 1.3% | 14.7% |
| Brent US$/oz | 93.30 | -0.4% | 10.5% | 3.9% |
| SA 10 year bond yield | 10.55 | 1.2% | 0.2% | 0.6% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f |
|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.7 | 1.1 | 1.7 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 1.1 | 1.3 | 1.2 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 5.3 | 3.3 | 4.3 |
| 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 |
| * To be reviewed soon |
