General
Publications & Data
Join the conversation
Social Links
Social Links
While it was initially difficult to decide where to start the Weekly - as it was a big week locally, globally, economically and politically - last night’s address by ANC President Cyril Ramaphosa swooped in to take the top spot. In the delayed speech (reminiscent of late Sunday night family meetings during COVID), Ramaphosa announced that the party would be seeking a government of national unity. Listening to the speech, Ramaphosa came across as humble, and he was at pains to stress that the ANC had accepted the election results and had taken the slide insupport to heart. Ramaphosa said that the ANC would be seeking a government of national unity that would first and foremost need to tackle the pressing issues that South Africans want to be addressed, including job creation, inclusive economic growth, high cost of living, service delivery, crime and corruption. Ramaphosa said that the ANC would be open to discussions with any political party “so long as it is in the public interest” (with MK not mentioned in the list of parties the ANC is currently engaging with). It is encouraging that, according to Ramaphosa, constructive discussions with some political parties have already taken place. The speech also emphasised that this government should reach beyond the political realm and wanted to engage with all social partners. We are not in a position to comment on the practicalities of the workings of this proposed type of government, but bringing together parties from across the political spectrum and making tough policy decisions is probably easier said than done. Of course, with a still sizeable 40% for the ANC, it is not necessary for every party to agree fully on all matters. Indeed, it also remains to be seen whether parties are willing to accept the ANC’s invitation and if they are willing to work together with not just the ANC, but also each other. There are parties with starkly different (even opposing) mandates, and some parties may ‘uninvite’ themselves. In the end, it is important to have a government that works efficiently and is able to implement coherent, realistic and sustainable policies without too much delay.
Moving to global politics, after SA’s election results were announced over the weekend, we saw a(nother?) shock election outcome, in India, during the week. After 642 million citizens cast their vote, Narendra Modi's Bharatiya Janata Party (BJP) won the election, but with a significantly reduced mandate. Investors had been betting on a Modi landslide so Indian stocks, bonds and the rupee tumbled when it became clear that the BJP would perform much weaker than expected. The ruling party won 240 seats in the 543-seat lower house, and while it thus still is the biggest party, the BJP will have to rely on smaller party allies to form a government. In contrast to SA and India where the respective ruling parties lost significant support, the governing party in Mexico saw a surge in support. Indeed, the extent of the victory spooked markets as it could give the party scope to change the constitution to eliminate checks and balances on government. The global focus is now shifting to the 373 million Europeans in 27 European Union member countries voting to elect the next European Parliament. Polls have pointed to big gains for hard-right parties in some countries, which could have significant implications for shaping European policy over time. Results will start flowing in from late Sunday.
The big economic news last week was the cementing of the ‘transatlantic divide’ in monetary policy as the European Central Bank (ECB) followed some of its European counterparts in cutting its policy interest rate before the US Federal Reserve (Fed). On Thursday, the ECB delivered on its all-but-promised 25bps rate cut. Despite a slight upward revision to its 2024 and 2025 inflation forecast (and an upward revision to GDP for both years), the ECB was comfortable starting the easing cycle. That said, the process is likely to be slow – more details are in the international section below.
On the local data front, we saw a slew of releases – see the domestic section below for more. The good news (a slight improvement in the RMB/BER BCI in Q2) was countered by bad news in the form of an unexpected contraction in GDP in Q1. While we had cautioned that a stagnation or contraction was possible, the outcome was weaker than we (and the consensus) had expected. The Absa PMI print for May was also disappointing, and it remains difficult to make a firm call on GDP dynamics in Q2. To be sure, we are not expecting a technical recession at this stage and do see growth bounce back somewhat, but the upward revision to 2023Q4 and poor 2024Q1 GDP data point to downside risk to our 1.3% full-year growth forecast. In other domestic news, flooding and other natural disasters across the country have resulted in the loss of life and damage to property and infrastructure.
Finally, SA financial market assets remain sensitive to the political news cycle, and this is likely to remain the case until we have clarity on the new government's composition. The rand exchange rate has steadily, albeit slowly, weakened against the major currencies since the election last week. The rand is currently about 2% weaker to the euro, pound and dollar from Thursday last week. The JSE ALSI is flat w-o-w. Broadly speaking, however, SA assets have been significantly more stable than the swings experienced in Mexico and India after their election news broke.
The Brent crude oil price dipped below $80/barrel on Monday for the first time since February this year and is more than 6% down from last Thursday. The major story on oil stems from the OPEC+ meeting that took place over the weekend. While pledging to stick with the existing output cut (of about 3 million barrels per day) into 2025, it said that eight of its members could start to unwind some of the additional voluntary cuts later this year.
The main global focus next week will be on the outcome of the European Parliament elections and the US Fed interest rate decision. The US Fed is unlikely to follow the ECB in starting its cutting cycle in June. Instead, markets will focus on the economic projections accompanying the statement and will scrutinise the ‘dot plot’ to get a sense of what can be expected through the remainder of the year. Markets currently expect the first reduction in September with another 25bps cut later in the year, but a big surprise in this afternoon’s labour market data may already lead to a reassessment of this view, even before the Fed meeting next week.
Locally, the manufacturing and mining data for April are keenly awaited to better understand how the absence of load-shedding could have impacted production in the second quarter. The solid improvement in the April Absa PMI bodes well for manufacturing production, which tanked on an annual basis in March. Mining production was also very weak in March and could bounce back in April.
The economy had a poor start to the year. According to Stats SA, real GDP contracted by 0.1% q-o-q in 2024Q1 from an upwardly revised 0.3% q-o-q expansion in 2023Q4. The sluggish headline print was underscored by broad-based weakness on the demand side. Fixed investment declined by 1.8% q-o-q, while even consumer and government spending dipped from Q4. Net exports were the only positive contributor (+0.9%pts) as imports fell by more than exports. From the production side, agriculture surprised on the upside, contributing 0.3%pts to growth. Meanwhile, manufacturing trimmed 0.2%pts from growth. A further analysis for clients can be found here.
Decline in imports was the only positive contribution to expenditure-side GDP
Source: Stats SA, own calculations
The more upbeat news was that the current account deficit narrowed from 2.3% of GDP in 2023Q4 to 1.2% in 2024Q1, which was better than consensus. Encouragingly, the trade surplus widened, which was underscored by marginally higher prices on the export front coupled with slimmed-down import volumes.
The RMB/BER Business Confidence Index (BCI) ticked up by 5 points to 35% in Q2. This means that just over a third of survey respondents, (the survey predated the 29 May national election), were satisfied with prevailing business conditions. The uncertainty around the election was top of mind for many respondents, with comments alluding to a ‘wait-and-see’ approach, likely holding back domestic demand. Encouragingly, there was an uptick in activity and prices rose at a slower pace across the board.
Following a welcome 54-point print in April, the Absa PMI declined into contractionary terrain, to 43.8, in May. Owing to a substantial drop in demand, business activity in the manufacturing sector weakened. Despite a second consecutive month of no load-shedding, election uncertainty saw new sales orders being placed on hold. Meanwhile, bottlenecks are slightly improving at the ports with shorter supplier delivery times. On a positive note, business conditions in six months’ time are expected to improve as manufacturers are becoming upbeat relative to current conditions. Contrastingly, the S&P Global SA PMI fractionally rose to 50.4 points in May from 50.3 in April.
New vehicle sales sharply declined by 14.2% y-o-y in May, according to naamsa. Cash-strapped consumers continue to put off big-ticket purchases, with demand in the automotive industry remaining weak. In step, the BCI showed that confidence among new vehicle dealers remains significantly depressed, with nine out of ten respondents unsatisfied with the prevailing business conditions. It is worth mentioning that the base in May 2023 was a robust 10.1% y-o-y, and hence, the latest print should be considered in light of that.
Finally, we move back to April data. The lack of load-shedding during the month lifted electricity output by 1.2% m-o-m and a significant 5.7% y-o-y. This is a good start for the utilities sector which was a slight drag on GDP in Q1.
.jpg)
On Thursday, the ECB reduced its main interest rate by 25bps to 4.25%. The move was widely expected and marked the first reduction in borrowing costs in almost five years, driven by a notable slowdown in inflation. However, amid elevated wage growth, domestic price pressures persist, which means that inflation will likely remain above 2% well into next year. Indeed, the latest headline and core inflation projections have been revised upwards for 2024 and 2025, with staff seeing headline inflation averaging 2.5% in 2024 and 2.2% in 2025 before moderating to 1.9% in 2026. Excluding energy and food, core inflation is projected at 2.8% in 2024, 2.2% in 2025, and 2% in 2026. Meanwhile, economic growth is expected to increase to 0.9% in 2024, 1.4% in 2025, and 1.6% in 2026. The ECB aims to maintain policy rates at restrictive levels “for as long as necessary” to return to its 2% medium-term target.
Still in the Eurozone, retail trade volumes (sa) fell by 0.5% m-o-m in April, following a (downwardly) revised 0.7% increase in March. This downturn was primarily due to a 2.2% drop in auto fuel sales. On an annual basis, retail trade volumes (sa) stalled in April, following a 0.7% rise in March.
In other monetary policy news, the Bank of Canada (BoC) cut its key interest rate by 25bps to 4.75% at its June meeting. The central bank is among the first G7 countries to do so. The BoC remained open to the possibility of further interest rate cuts, provided inflation continues to ease and confidence in reaching the 2% target increases.
Across the Atlantic, contrasting dynamics were observed within the US manufacturing sector. The ISM Manufacturing PMI unexpectedly edged lower to 48.7 in May from 49.2 in April. This was the 18th contraction in the past 19 months, influenced primarily by tepid demand. In contrast, the S&P Global Manufacturing PMI rose to an above-consensus 51.3 in May from a preliminary 50.9. This compares to 50 in April, indicating a modest improvement in the sector’s health.
On the services front, the ISM Services PMI surprised on the upside. The headline PMI surged to 53.8 in May from 49.4 in April. This was the highest reading in nine months, driven by increased business activity and new orders.
Finally, following weaker-than-expected official PMI data last week (see here), private sector PMI data in China signalled improved conditions in May. The Caixin General Manufacturing PMI increased to 51.7 (vs 51.4 in April), marking a seventh consecutive month of expansion and the quickest in nearly two years. This growth was driven by a notable increase in output and new orders. Amid strong domestic and external demand, the General Services PMI also experienced robust growth, reaching 54 in May (vs 52.5 in April), the fastest expansion since July 2023. The overarching General Composite PMI reflected this positive trend and ascended to 54.1 (vs 52.8 in April), the highest level since May 2023.
Editor: Lisette IJssel de Schepper
Tel: +27 (21) 808 9777
Email: lisette@sun.ac.za
Click here for previous editions of this publication.
Please refer to the glossary on the BER website for explanations of technical terms.
Friday, 07 Jun 2024
