General
Publications & Data
Join the conversation
Social Links
Social Links
Yesterday, the SA Reserve Bank (SARB) and the European Central Bank (ECB) both kept their respective policy interest rates unchanged. This was in line with expectations—clients can read our take on the SARB’s decision here. Less expected was the (relatively) weak performance of the Chinese economy in Q2 (see the international section for more). Locally, President Cyril Ramaphosa delivered his Opening of Parliament Address (OPA) last night.
For the first time, Ramaphosa essentially spoke on behalf of the entire Government of National Unity (GNU) instead of just representing his party in parliament. His speech emphasised that the GNU would focus on driving inclusive economic growth and job creation, reducing poverty, and tackling the cost of living while building a capable, ethical, and developmental state. The acknowledgement that improving the competitiveness of our economy and that small businesses and the informal sector are important for inclusive growth and job creation is welcome. A commitment to decrease the undue regulatory burden imposed by red tape would go a long way in reducing the cost of doing business in SA – something we have long argued is vital in accelerating growth. Focus on visa reform could be a quick win for the seventh administration. The speech also made it clear that BEE stays, a form of income support t for the unemployed is in the pipeline (spinning off from the current social relief of distress grant) and that they will continue to pursue the implementation of the national health insurance (NHI). Regarding the latter, it is at least encouraging that Ramaphosa mentioned the involvement of the public and the private sector going forward. The reference to the establishment of a “state-owned SOE holding company” supposedly giving the government a greater capacity to build a sovereign wealth fund is questionable.
Encouraging was the GNU’s continued support of Operation Vulindlela (OV). OV has been successful on a number of fronts, particularly energy (progress on some others has been slower). OV phase 2 is also set to include (among other things) a focus on local government, the core of service delivery. Broadly speaking, the speech mentioned all the right things, but, as always, the crux of the case lies in the implementation of these plans. A new challenge for the government will be for all GNU parties to remain committed to the Medium-Term Development Plan, even as disagreements inevitably surface.
Speaking of plans (and hopefully implementation), in his Budget Vote, Finance Minister Enoch Godongwana said that National Treasury is working on signing agreements within the water and transport sectors to fast-track private sector participation. Agreements akin to the Independent Power Producers (IPP) programme are being planned. Meanwhile, the African Development Bank (AfDB) approved a R18.5bn loan to Transnet to support its recovery plan. Back to Godogwana, he also mentioned that more infrastructure-related reforms outside of the (cumbersome) budget process are planned too. Progress is reportedly also being made on getting SA removed from the ‘grey list’ in 2025. Other plans spoken about in policy spheres this week could potentially be less positive. Parks Tau, the new trade, industry & competition minister, argued that regulation 28 of the Pension Fund Act should be amended to allow pension funds and asset managers to finance industrial policy initiatives. Merely allowing asset managers to invest at their discretion is fine, but it can become problematic if there is a prescription of how much and where to invest especially given the fiduciary mandate of pension trustees to act in members’ best interest.
US politics was, again, in focus following an assassination attempt on former President and Republican presidential nominee Donald Trump. Later in the week, Trump announced that JD Vance would be his running mate for the upcoming November election. Vance’s populist policies largely align with those of Trump, and he has been vocally against providing more support to Ukraine and in favour of increasing tariffs on China as he sees the country as a big threat to the US. Without debating the merits and disadvantages of trade protection, it is obvious that a full-blown trade war between the global superpowers would be negative for global growth and, thus, a small, open economy like SA. Indeed, whether a Trump presidency would be good for the US economy remains to be seen. Long-term US Treasuries have been coming under pressure as traders worry that a Trump presidency would be negative for the country’s finances and could fuel inflation. The gold price hit a record high for similar reasons, with traders turning to safe-haven assets.
In currency markets, the dollar dipped to a two-month low early in the week. This was also due to a surge in the Japanese yen. The yen rose to a six-week high after reports that the Bank of Japan had intervened to prop up its currency after the yen slumped to a 38-year low against the US dollar. The dollar found renewed strength midweek as safe-haven flows picked up on concerns geopolitical tension between the US and China could escalate. Trump’s stance on China is well known, but current President Joe Biden also indicated he would consider severe trade restrictions to prevent China from accessing high-end chipmaking tools. This weighed on the stock prices of major chip makers. Global markets performance was mixed this week so far, with the local JSE Alsi moving lower relative to last Thursday’s close. The rand exchange rate lost some ground against the major currencies.
Meanwhile, in China, members of the Communist Party met for its ‘third plenum’ to set economic goals for the next decade or so. The Chinese economy is arguably in need of more structural reform, with an ongoing crisis in the property sector and local governments struggling with debt. Consumer confidence is very low, and the risk of trade restrictions from the US and Europe could hurt export-led growth. However, nothing major was announced despite the weaker-than-expected Q2 GDP print underscoring the underlying weakness.
The biggest release on the domestic data calendar is consumer inflation (CPI) for June. After remaining unchanged at 5.2% y-o-y in May, we foresee a slight downtick in headline inflation to 5.1% in June (with core unchanged at 4.6%). This would be the lowest headline inflation print this year. Price pressure is set to slow further during the second half of the year, with CPI expected to average around 4.8% for the full year – down from 6% in 2023. We expect CPI to slow to the midpoint of the SARB target by the end of Q3 and to stay below that level through Q4. Producer price inflation (PPI) follows the next day (on Thursday). We expect annual headline PPI to ease 4.5% in June on the back of an expected m-o-m decline. Similar to CPI, factory-gate price pressure should abate through the second half of this year.
On the international front, Wednesday will bring the usual batch of flash PMI figures for Europe and the US. On Thursday, the focus turns squarely to the US, with the advance estimate for Q2 GDP expected. Following a weaker Q1, growth is expected to pick up in Q2. The June PCE price data due on Friday will be important for ‘Fed watchers’ as it is the central bank’s preferred measure of price changes.
In line with expectations, the Monetary Policy Committee (MPC) of the SARB kept the repo rate unchanged at 8.25%. This was the seventh meeting of no change. The SARB presented an improved headline inflation forecast. It sees CPI inflation average 4.9% this year, down from the 5.1% forecast in May, and dip below the 4.5% midpoint in coming quarters amid more favourable food and fuel price dynamics. However, risks are still on the upside and explain why the majority of MPC members voted to keep the rate on hold. Looking ahead, with an improved inflation profile and inflation expectations drifting lower, we think that the SARB could have the scope to start a shallow-cutting cycle later in September – for more on the interest rate decision and our inflation outlook, clients can download a comment here.
Annual retail sales registered a modest 0.8% rise in May, slightly higher than the 0.7% increase in April. The uptick in retail sales was broad-based amongst retailers, with general dealers contributing the most to the overall increase (up 1.7% y-o-y; contributing 0.7%pts). Retailers in textiles, clothing, footwear and leather products were the only drag across the board (-4.9% y-o-y; -0.9%pts). Seasonally adjusted (sa) retail sales fell by 0.7% m-o-m in May compared to a 0.5% m-o-m uptick in April. This suggests that retail will still add positively to Q2 GDP, barring an unlikely steep cut in June. Looking further ahead, the gradual improvement in consumer sentiment coupled with easing inflation and possibly lower interest rates could boost real household consumption in the coming months.
Moving along to motor trade sales, following an annual 3.4% increase in April, sales declined by a sharp 8.6% in May. On a monthly basis, motor trade sales (sa) fell by 4.9% in May (from a 6.2% rise in April). The steep decline in new vehicle sales is indicative of cash-strapped consumers shying away from big-ticket purchases.
Finally, annual wholesale trade sales declined by a notable 6.6% in May after a 0.7% uptick in April. On a monthly basis, wholesale trade sales (sa) decreased 3.6% in May compared to a 5.8% increase in the previous month. Average real sales in April and May were largely in line with Q1, which means that June will play a big role in determining the sector’s contribution to GDP.
.jpg)
INTERNATIONAL SECTIONAs widely expected, the ECB kept its main policy rate unchanged at 4.25%. While acknowledging that some indicators of underlying inflation increased in May due to one-time factors, the ECB noted that most indicators remained stable or decreased in June. As expected, profits have cushioned high wage growth’s inflationary impact, while financing conditions remain restrictive. However, domestic price pressures remain elevated, and headline inflation is expected to stay above the 2% target next year. The ECB is committed to returning inflation to its target, maintaining a high policy rate as necessary.
Consumer inflation in the UK held steady at 2% y-o-y in June. Price pressures from restaurants and hotels (6.2% in June vs 5.8% in May) were partly to blame for the higher-than-expected inflation outcome. Inflation for food and non-alcoholic beverages eased to 1.5% y-o-y, the lowest since October 2021. At 3.5%, annual core inflation, which excludes food and energy costs, remained steady. Headline CPI increased by 0.1% m-o-m in June, the lowest in five months. Investors now put the probability of a 25bps cut by the Bank of England (BoE) in August at just over a third, having previously been evenly split.
Across the Atlantic, the US consumer showed resilience as retail sales remained unchanged in June (the consensus was for a 0.2% m-o-m decline). This follows an upwardly revised 0.3% increase in May, as a drop in receipts at gasoline stations (-3%) and auto dealerships (-2.3%) was offset by gains elsewhere. Notably, sales rose at nonstore retailers (1.9%) and building materials and garden equipment stores (1.4%).
Finally, the Chinese economy underperformed in 2024Q2, growing by ‘just’ 4.7% y-o-y (vs market forecasts of 5.1%), following a 5.3% expansion in Q1. This marks the slowest annual growth since 2023Q1, reflecting sluggish domestic demand and a protracted property market downturn. For the first half of 2024, the economy grew by 5%, aligning with the government’s annual GDP growth target of around 5%.
While no significant economic policy changes were signalled in China’s Third Plenum meeting to spur demand, the consumer sector underpins the economy’s faltering performance. Indeed, retail sales disappointed in June, increasing ‘only’ 2% y-o-y (vs market forecasts of 3.3%). This was the weakest reading in 18 months, following a 3.7% y-o-y increase in May. Retail activity fell by 0.1% m-o-m, the first decline since July 2023.
Industrial production, meanwhile, fared better, increasing by a bigger-than-expected 5.3% y-o-y in June, following a 5.6% expansion in May. Although the headline reading surprised on the upside, it was the lowest growth since March, driven by a deceleration in manufacturing activity (5.5% vs 6%). Industrial activity grew by 0.4% m-o-m in June, up from 0.3% in May.
Editor: Lisette IJssel de Schepper
Tel: +27 (0)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, 19 Jul 2024
