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Lisette IJssel de Schepper
The most unexpected development over the past few days has been the announcement of far-reaching stimulus measures in China. While it was long anticipated that the government would step up on stimulus to prop up sluggish growth momentum, measures introduced so far have been underwhelming. As such, the extent of this week’s intervention was bigger than most expected. Hogging the local headlines was the rand exchange rate continuing its recent strengthening trend and dipping below R17.15/$ during yesterday's trade. It is currently hovering around the best level since February 2023. As usual, global factors are at play, with the Chinese stimulus announcement helping the ‘commodity currency’ and general risk appetite, but it must be said that SA financial assets are generally performing quite well. Indeed, the JSE all share index rose to a record high on Thursday.
To start with China, authorities introduced a comprehensive stimulus package aimed at reviving its slowing economy. On the monetary front, the People’s Bank of China (PBoC) announced a significant injection of liquidity into the financial system, with the goal of stabilising markets and boosting investor confidence. At the core of the package is an 800 billion yuan ($113 billion) programme to support the equity market, with more plans to establish a market stabilisation fund. Further monetary easing measures (incl. policy rate cuts) were announced to support the ailing property market, with the PBoC vowing to take quick action to boost the economy. Later in the week, the government essentially promised that the necessary spending to hit its 5% growth target would take place, with more details about the fiscal package expected next week. The question remains whether the measures will be targeted enough to address the deep, structural issues in the property sector in particular, but, for now, China’s equity market responded positively to the announcements. The CSI 300 benchmark index rose further this morning and is on track for a more than 13% gain this week. This would be the best weekly gain since late 2008, when China introduced a large stimulus package in response to the global financial crisis.
On the global data front, the poor Eurozone PMI print (see international section) added to bets that the European Central Bank (ECB) will cut faster and/or by more than previously priced in. There are particular concerns about Germany, while the Olympics-boost to French activity was not sustained in September. France does, finally, have a government in place. However, amid concerns about low growth and increased fiscal pressure, the French sovereign debt profile continued to deteriorate with 10-year yields now above those of Spain. This is the first time this happened since 2007. Meanwhile, in line with expectations, the Swiss National Bank cut its policy rate by a further 25bps to 1% and said it is prepared to intervene in currency markets if needed. Across the Atlantic, disappointing consumer confidence data from the US early in the week bolstered the case for deeper rate cuts by the US Federal Reserve (Fed) following its outsized 50bps cut last week. This propelled the gold price to a record high.
Back to local headlines, the ANC-led removal of the DA’s Cilliers Brink as executive mayor of Tshwane reminded us that despite positive signs of the national government working well together, things might be different on a more localised level. Furthermore, while the figures have been floating around for some time, it was confirmed that Eskom applied to NERSA for a 36.2% increase in electricity tariffs in the 2026 financial year, followed by 11.8% in 2027 and 9.1% in 2028. While it remains to be seen what NERSA will grant the power utility (which is unlikely to be the full 36%), this does provide a real upside risk to inflation as it not only directly pushes up the electricity component of CPI, but also trickles to other prices as producers recoup costs. Of course, higher electricity costs continue to support the investment case for switching to renewable energy.
The continued strength in the rand exchange rate and the further dip in the Brent crude oil price have been more positive for local inflation – most notably through lower fuel prices, with another hefty decline expected next week. Reports that Saudi Arabia is ready to abandon its unofficial price target of $100/bbl and wants to ramp up production to regain market share have pushed oil prices lower. While OPEC+ production cuts have helped to keep prices elevated, this was countered by big increases in non-OPEC supply (the US) and lower demand from China.
Geopolitical risks in the broader Middle East region in particular, however, remain important for oil price dynamics Following the ‘pager attacks’ earlier this month, Israel continues its bombing campaign on Lebanon. The strikes have resulted in a rising death toll and civilians fleeing the area. Hizbollah (Israel’s attended target) is firing projectiles back at Israel and says that they will continue to attack until a ceasefire deal is reached in Gaza. Following reports that Israel was preparing for a ground offensive in Lebanon, international calls for a ceasefire between Israel and Hizbollah intensified, with the hope that a (temporary) truce reached there could also aid discussions around Gaza.
Later today, the US Fed’s preferred measure of inflation will be released, and analysts will scrutinise the sticky housing and services component. Meanwhile, a massive strike (involving about 45 000 dockworkers) is expected to start on 1 October at some of the busiest container ports in the US. The economic impact may be limited as many of those potentially impacted frontloaded their imports to prevent disruptions ahead of the holiday season. Still, it could even indirectly impact the upcoming presidential election, with both candidates vying for union votes. On the US data front, next week’s nonfarm payroll data will be important with the Fed’s focus now firmly on the jobs part of its dual mandate.
In SA, we see the usual batch of month-end and first-of-the-month data releases in one week. Both the Absa PMI and naamsa new vehicle sales have been volatile in recent months, with the jittery PMI foreshadowing movements in the actual manufacturing production quite well. The PMI pulled back sharply in August following a strong July, with next week’s release completing the picture for Q3.
Annual headline producer price inflation (PPI) moderated significantly in August, coming in at 2.8%, down from 4.2% in July. This was below consensus expectations and marked the slowest increase in producer prices since July 2023. The slowdown was primarily driven by softer price increases in categories such as coke, petroleum, chemicals, and rubber & plastic products (up 2.1% y-o-y in August vs 5.0% y-o-y in July) as well as metals, machinery & computer equipment (up 3.5% vs 4.9%).
However, food inflation, excluding beverages and tobacco products, edged up slightly to 3.4% y-o-y in August from 3.3% in July, indicating that the impact of earlier weather-related shocks is beginning to materialise. On a monthly basis, PPI declined further by 0.3% following a 0.2% decrease in the previous month.
Overall, the moderation in producer price inflation suggests that consumer price increases are also likely to continue trending lower in the coming months.
Turning to the job market, Stats SA’s Quarterly Employment Statistics (QES) report showed that formal non-agriculture employment increased by 42 000 jobs (+0.4% q-o-q) in 2024Q2. However, this was fully driven by a 91 000 surge in employment by extra-budgetary institutions in the public sector (i.e. temporary employment around the election). Without this boost, employment would have been down by 48 000 q-o-q amid a broad-based decline across industries such as business services, construction, manufacturing, mining, transport, and trade. Disappointingly, total formal employment declined by 1.3% y-o-y (-144 000) in Q2 (excluding the election employment, jobs were down by 238 000 y-o-y), indicating continued weakness in the domestic labour market.
In other news, the SARB’s composite leading business cycle indicator increased for the first time in three months, rising by 0.7% m-o-m in July, recovering from a downwardly revised 0.1% drop in June. Six out of ten available time series showed increases.
The flash S&P Global US composite PMI ticked down to 54.4 in September from 54.6 in August, marginally beating market forecasts of a decline to 54.3. The services sector continues to buoy overall activity, registering a solid pace of expansion while manufacturing activity slumped to a 15-month low. The headline index signals a continuation of solid US economic activity throughout the third quarter, but business confidence sharply deteriorated to a near two-year low in September. This was led by the services sector which reported heightened uncertainty around demand ahead of the November presidential election.
The final estimate provided additional evidence of the US economy’s resilience, showing that real GDP grew at an annualised rate of 3% q-o-q in 2024Q2 (unchanged from the second estimate). This follows an upwardly revised 1.6% q-o-q expansion in Q1 and upward revisions to 2022 and 2023 data pointing to a stronger post-COVID bounceback than initially expected.
Across the Atlantic, the S&P Global flash composite PMI for the UK fell to a below consensus 52.9 in September from 53.8 in the prior month. The decline was driven by slower output growth in both the manufacturing and services sectors. However, new orders remained robust in the services sector, while in contrast, manufacturers faced poor demand. Although improvements in broader economic conditions have contributed to the continued rise in business optimism, both sectors reported heightened business uncertainty restraining demand ahead of the UK’s Autumn Budget.
In the EZ, the flash HCOB composite PMI surprised on the downside, dipping below the 50-neutral point for the first time since January 2024. The headline PMI fell from 51 in August to 48.9 in September. While both the manufacturing and services sectors saw business activity decline, the downturn was more pronounced in the former. The reduction in overall business activity and confidence was once again a symptom of worsening conditions in the manufacturing sector (particularly pronounced in Germany and France). Steeper declines in manufacturing output, new business and new export orders, led to the sharpest reduction of employment in the sector since December 2020.
Worryingly, Germany’s economic woes are showing no signs of easing, as the composite PMI sank further into contraction (47.2 in September from 48.4 in August). Moreover, the Ifo business climate index signalled a further deterioration of business activity, declining for a fourth straight month to 85.4 in September from 86.6 in the prior month.
Slightly better news was that the German Gfk Consumer Climate Indicator ticked up to -21.2 for October from -21.9 in September. The moderate lift was driven by a rise in income expectations (10.1 in October from 3.5) and the propensity to buy (-6.9 from -10.9). However, a second consecutive month of declining economic prospects still points to a challenging economic climate in Germany.
We will soon release a new feature on our website: the BER data playground. This feature will allow users to view, track and compare various datasets from Stats SA and the SARB. Below is an example of some of the data released in yesterday’s Quarterly Bulletin by the SARB. The rise of real services spending over the last six decades is quite remarkable, with the impact of COVID-19 equally striking. Zooming in on the last ten years shows how spending has been essentially stagnant over the last decade, with an ever-so-slight uptick in the latest quarter.
Editor: Lisette IJssel de Schepper
Tel: +27 (0)21 808 9755
Email: lisette@sun.ac.za
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Please refer to the glossary on the BER website for explanations of technical terms.
Friday, 27 Sep 2024
