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Amid a mixed bag of internal trade data releases, the domestic economic news unpacked the South African Reserve Bank’s (SARB) biannual Monetary Policy Review (MPR). Administrated prices remain a key concern for the Bank, with more details around Eskom’s hefty tariff increase application discussed in more detail below. Internationally, the European Central Bank (ECB) cut its policy interest rate, in line with expectations. The most important data release was arguably this morning’s China GDP release, with the much-anticipated announcement of the details around the fiscal stimulus package earlier in the week disappointing markets.
Starting with the SARB’s MPR release on Tuesday, the bank noted that it had to downwardly revise its inflation forecasts due to faster-than-expected deflation, driven by food and fuel. As headline inflation eases, the Bank is now focused on tracking the second-round effects of inflation, including core inflation and inflation expectations. The SARB also flagged that the two-year ahead inflation expectation remains above its preferred target. Furthermore, ongoing risks stem from volatile supply-side inflation, particularly from geopolitical factors affecting oil prices and domestic administered price pressures.
On Thursday, speaking at Stellenbosch University, SARB Governor Lesetja Kganyago suggested that SA could adopt a lower inflation target with minimal cost. The governor emphasised that aiming for a 4.5% midpoint has helped reduce inflation and interest rates with little impact on economic growth. He argued that a narrower inflation target aligned with other emerging markets and would better anchor inflation expectations at lower levels, supporting the bank's long-term goals.
In global news, Q3 GDP data from China released earlier this morning showed that the economy expanded at its slowest pace in 18 months. On an annual basis, the economy grew by 4.6%, below the 4.7% recorded in Q2 and the government's target of about 5% growth. Indicative of weak domestic demand, prices declined for a sixth consecutive quarter. Concerns about the weak growth have led authorities to announce a comprehensive stimulus package in recent weeks. On the fiscal front, China pledged on Saturday to "significantly increase" debt to stimulate its slowing economy but left investors uncertain about the scale of the stimulus package. Finance Minister Lan Foan announced measures to help local governments manage debt, support low-income individuals, and boost the property market and state banks. However, he did not specify the total amount of funding. This lack of detail has kept investors on edge as China's economy struggles with deflationary pressures and a weakened property market.
Further steps announced by the Chinese Housing Ministry on Thursday include expanding a "white list" of housing projects eligible for financing and increasing bank lending for these developments to 4 trillion yuan ($562 billion) by year-end. The government will also accelerate urban redevelopment, including the resettlement of people to absorb housing inventories.
Despite these measures, which investors had hoped for, the absence of specific figures led to a 4% weekly decline in the Shanghai Stock Exchange. Investors may have to wait until China's legislature meets, though a date has yet to be set, for further clarification on the economic plan.
Speaking of financial markets, strong earnings from US tech companies boosted the S&P 500, while lower inflation in the Eurozone and UK fuelled expectations of more aggressive monetary easing by the ECB and BoE, lifting European stocks.
The US dollar surged to an 11-week high, driven by strong retail sales and lower-than-expected jobless claims, signalling a robust economy. The SA rand slipped against the stronger dollar. The local currency also lost ground to both the euro and the UK pound amid more risk-off sentiment, as seen in EM bond yields and the gold price. Indeed, SA bond yields rose by 16 basis points.
The gold price hit another record high due to geopolitical tensions and prospects of further US Federal Reserve rate cuts. Markets are now pricing in a 90% chance of a 25 bps Fed cut at its meeting in November. Weaker inflation data in Europe and the UK also boosted expectations of ECB and BoE easing, supporting gold prices. This is because it is a non-yielding asset that tends to gain when interest rates (and bond yields) fall.
The Brent crude oil price fell 4.9% this week. Israel’s announcement that it would not target Iranian oil facilities eased concerns about supply disruptions. In addition, OPEC's downward revision to its 2024 and 2025 demand growth forecasts contributed to the decline. Separately, the UK imposition of sanctions on Russian oil and LNG vessels did little to pressure the market.
On the electricity front, markets await NERSA's decision on Eskom’s application for a 36% tariff increase. As highlighted below, 11.2 %pts of the requested tariff increase comes from increased primary energy costs, primarily coal-related costs. In comparison, the increased use of independent power producers reduces the requested tariff by 2.3 %pts.
In a related development, a 2022 study recently came to light, commissioned by Eskom on the “Macroeconomic impact assessment of Eskom’s pricing path toward cost reflectivity” by Genesis Analytics and the University of Pretoria. The paper argues that an increase in electricity prices will be positive for growth. The channels are stability of electricity supply, improved efficiency of electricity use and a reduction in the fiscal burden (which is positive for national borrowing). Without these positive benefits, the study does find a rather substantial negative impact from only the increase in the cost of electricity.
This is likely to form the basis of Eskom’s argument to NERSA. Historically, however, NERSA has granted tariff increases that are lower than Eskom’s requests.
In logistics, there was some progress toward a liquefied natural gas (LNG) terminal (Richards Bay Zululand terminal) that could come online as early as 2027 for imports to help avoid gas supply shortages in the country. The first phase of the Richards Bay LNG Terminal is scheduled to be completed by 2028Q1, though efforts are being made to accelerate this timeline to early 2027. This gas-to-power project pipeline intends to improve energy security and emissions reduction.
After a busy week, the upcoming data release calendar will be relatively quiet. In SA, the SARB will publish its leading business cycle indicator for August, following a 0.7% m-o-m recovery in July. A key focus will be Stats SA's release of the September Consumer Price Index (CPI) on Tuesday. This index is expected to show further moderation in headline inflation, aided by a recent petrol price cut that helped bring CPI further below the midpoint of the Reserve Bank's target range.
Internationally, October flash PMIs will be released. The US Manufacturing PMI, which has been in contraction (below 50) for three consecutive months, is expected to show another decline. The Eurozone PMI has been below 50 for over two years, with little hope of a rebound, particularly as Germany’s manufacturing sector faces challenges. On Friday, Germany’s Ifo business climate index will be released, following a September reading that was the lowest since January 2024. Additionally, data on US durable goods orders will be released on Friday.
According to Stats SA, real retail trade sales rose by 3.2% y-o-y in August, surpassing expectations of a 2.3% rise. This followed a downwardly revised 1.7% expansion in July. The largest contribution to the annual figure came from general dealers (up 4.6%, adding 2.1% pts). Seasonally adjusted (sa) retail sales rose by 0.5% m-o-m, following a 0.2% decline in the prior month.
Moving to the wholesale sector, sales decreased by 14.6% y-o-y in August, continuing a downward trend that has now stretched for 12 months. On a monthly basis, real wholesale trade sales (sa) were 5.3% lower in August compared to July. Meanwhile, real motor trade sales declined by 2.4% y-o-y, following a modest 0.2% y-o-y rebound in the previous month. The biggest drag came from sales of accessories (-7.9% y-o-y, -1.7% pts) and new vehicle sales (-4.9% y-o-y, -1.2% pts). On an encouraging note, used vehicle sales rose by 7.5% (+1.5% pts), making them the only positive contributor for a second straight month. Furthermore, monthly real motor trade sales (sa) remained unchanged in August, following a 0.5% m-o-m gain in July.
As anticipated, the ECB reduced its deposit rate by 25 basis points (bps) for the third time this year to 3.25%. This decision follows inflation falling below the 2% target for the first time in over three years, alongside mounting evidence of a weakening Eurozone economy. In its statement, the ECB indicated that progress towards stabilising inflation at the 2% target is on track. However, officials did not specify the pace of future rate cuts, stressing that the policy rate will remain restrictive for as long as necessary to achieve its mandate.
In other news, Germany's ZEW economic sentiment indicator rose to 13.1 points in October, up from 3.6 points in September, marking a rebound after three consecutive months of declining sentiment among financial experts. This improvement exceeded expectations, driven primarily by forecasts of low inflation and the anticipation of further interest rate cuts by the ECB. However, despite the positive outlook, nearly 90% of respondents still rate the current state of the German economy as poor, highlighting ongoing dissatisfaction with prevailing economic conditions.
Annual UK consumer inflation moderated to 1.7% y-o-y in September, down from 2.2% in August, undershooting market expectations of a 1.9% increase. This slowdown brings inflation below the Bank of England’s (BoE) 2% target. The decline was largely driven by softer service inflation, which eased to 4.9% y-o-y in September (from 5.6% in August), its lowest rate in over two years. Moreover, wage growth, a key driver of service inflation recently, grew at its slowest pace since June 2022. This indicates that inflationary pressures are easing, keeping the BoE on course for a potential interest rate cut in November.
Lastly, in the US, retail sales grew by 0.4% m-o-m in September, following a 0.1% increase in the previous month and surpassing market expectations of a 0.3% rise. This reflects the resilience of US consumers despite high inflation and tight financial conditions. Consumers increased spending on miscellaneous stores, personal care items, sporting goods, and building materials while spending less on electronics, apparel, furniture and at gas stations.
Editor: Tracey-lee Solomon
Email: tsolomon@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, 18 Oct 2024
