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The Medium Term Budget Policy Statement (MTBPS), delivered on Wednesday, was the highlight of the week domestically. The MTBPS was a little underwhelming, but to be fair, fiscal policy works better when there are no surprises. It was Budget Day in the UK, too, on Wednesday. The Labour Party ran on the promise of little change to economic policy but announced hefty tax increases to fund more health and education spending. On balance, it has attracted more negative comments than support. While the most interesting domestic data releases are scheduled for later today, the international calendar was jampacked, with Q3 GDP updates from the US and the Eurozone most important.
The first MTBPS under the Government of National Unity (GNU) reflected a delicate balance between fiscal discipline and socio-economic pressures – clients can read our detailed comment on the MTBPS here. At first glance, the better macroeconomic outlook beyond 2024 is at odds with a worsening fiscal picture, with a higher budget deficit, smaller primary surplus and slightly worse debt-to-GDP ratio projection compared to the February 2024 Budget. However, even though the fiscal metrics look “worse” than a few months ago, they still move in the right direction over the next three years. This largely reflects the trade-off that the Treasury has made for higher spending in the near term (with lower revenue) to enhance fiscal outcomes in the medium- to long term. Against a backdrop of moderate growth forecasts (that remain below 2% over the next three years) and heightened debt levels, the MTBPS seeks to build confidence domestically and among international investors while navigating SA's pressing economic and social needs. The MTBPS aimed to reinforce fiscal responsibility and strengthen investor confidence while supporting structural reform. Indeed, the MTBPS dedicated an entire chapter to infrastructure development reforms, which focus on partnerships with the private sector.
While the lack of surprises can be seen as a good thing, there were arguably also missed opportunities to cement further policy certainty, which would have been important for sustaining the recent uptick in sentiment. That said, not everything is in the hands of the Treasury. It is also important to remember that things do take time, and with just over 100 days since the GNU began, clearly, the new administration does not yet have a very clear reform and fiscal plan together. The lack of any significant announcements on big items (the fiscal anchor and the inflation target) suggests that there is a lot of behind-the-scenes discussion still needed. Moreover, the preparatory work for the next phase of Operation Vulindlela still needs to take place, but needs to be done quickly enough to maintain momentum on the crucial reform agenda.
Very relevant for fiscal metrics going forward are the ongoing public sector wage negotiations. Parties are seemingly moving closer together, but are likely to settle at a level above what is budgeted for in the MTBPS. The general manager of PSA (one of the largest labour unions involved) said that he expects an agreement for an increase of around 5.5-6%. While this is half of the initially demanded 12%, it is not only more than budgeted for, but also above the general CPI forecast for next year. The SARB has, on numerous occasions, flagged wage increases that are not keeping up with inflation as a key risk to the inflation outlook.
Domestic financial markets' reaction on Thursday morning, with the rand exchange rate dipping weaker, can perhaps also be best described as being underwhelmed. The rand managed to close yesterday a touch stronger w-o-w relative to a weaker dollar and gained more against an even weaker UK pound. The JSE ALSI fell by almost 2% w-o-w, with most of the losses recorded yesterday.
In commodity markets, the virtually flat w-o-w movement for the gold price masks that the unstoppable yellow metal hit another record high earlier in the week, reaching $2 782/oz on Wednesday. Meanwhile, the oil price declined by more than 2% last week. The biggest drop occurred on Monday after Israel’s attack on Iran avoided energy facilities, and Iran refrained from issuing a direct threat of retaliation.
The biggest event will be the US election on 5 November. While the focus is mainly on the tight race between Kamala Harris and Donald Trump, it is important to mention that both chambers of Congress are up for grabs. The current Democratic Senate is likely to swing to the Republicans, as many seats in Republican-leaning states are up for re-election. The House of Representatives is more closely contested. The number crunchers estimate there is a more than 50% chance of the new president having to work with at least one chamber “controlled” by the opposition party – this could make for sluggish policymaking when approval of both chambers is required. Pollsters, however, also put a bigger possibility on a Republican trifecta (one party winning the presidency and both chambers) vs a Democratic one. For now, the race for the presidency seems very tight and it is difficult to call who will win next week. Indeed, especially with a tight race and it likely coming down to the results in a (few) swing state(s), it may take several days before a clear winner is identified. There might be some turmoil if the losing party does not concede graciously, and only time will tell how (and if) the new President will change the policy landscape in the US and how this will impact the rest of the world.
The US Federal Reserve (Fed) will make its interest rate decision on 7 November. It is unlikely to be swayed much by the outcome of the election – in the near term at least - but today’s jobs data will be important. The October print is expected to be weak as flooding and power disruptions from Hurricanes Helene and Milton caused many businesses to close temporarily. Strikes in the manufacturing sector are also likely to undercut growth, which was already slowing. The Fed will have to look through these temporary movements to get a grip on the underlying strength of the labour market. Markets still see one or two 25bps cuts by the Fed in the remaining two meetings this year, which implies that the Fed could pause next week, although it is generally expected to cut. The Bank of England (BoE) meets on the same day as the Fed, markets are relatively convinced that it will further ease the policy stance. The BoE is broadly expected to lower its policy rate from 5 to 4.75%, although inflationary risks spilling over from this week’s spending splurge announced in the budget have diminished these odds slightly. The BoE is set to publish new economic projections too, which will be insightful for the long-term path.
The domestic data calendar is less exciting next week. As mentioned last week, we will see the Absa PMI and naamsa new vehicle sales for October later today. The S&P Global PMI due next week will provide further insight on private sector activity in October. From Stats SA, we see manufacturing utilisation data (for August) and, more importantly, for GDP dynamics, electricity production for September. The SARB will publish foreign reserve data for October.
The MTBPS signalled some of the key issues that the government is considering for the next phase of Operation Vulindlela (OV.2.0). There are two prongs to this. The first is following through on existing reforms, with four areas highlighted:
The second prong are the new areas highlighted by NT:
Overall, the market may be disappointed by the lack of detail on OV2.0, particularly after a strong end to OV1.0. However, the success of OV1.0 was in large part due to a clear planning process, the choice of clear and achievable objectives and a strong delivery mind-set. The preparatory work for OV2.0 still needs to take place but needs to be done quickly enough to maintain momentum on the crucial reform agenda.
Annual headline producer price inflation (PPI) moderated significantly in September, coming in at 1%, down from 2.8% in August. This PPI reading beats expectations for 1.3%, and it was the second consecutive month of a significant drop in producer inflation. On a monthly basis, the PPI decreased by 0.3%. The slowdown in prices was primarily due to price declines of 2.1% in the chemicals sector, while there were softer price increases in machinery and equipment, 3.4% in September compared to 3.5% in August. On the contrary, food inflation was up by 3.8% in September, compared to 3.6% in August. This was primarily due to a 12.9% increase in the prices of fruits and vegetables due to shortages in items like potatoes, where there is an estimated 32% yield lost in 3 674 hectares in Limpopo. However, Potato SA said that the news about shortages is exaggerated, and prices should moderate soon.
Official data showed that the budget balance in September came in at a deficit of R4.38 billion (bn), following a R19.4bn budget deficit in August, and significantly worse than the expectation for a R0.4bn deficit. In the MTBPS, Minister Godongwana stated that the deficit is expected to widen to 5% of GDP in the 2024/25 fiscal year (in line with our forecast), up from the 4.5% estimate in the February budget speech, mainly due to lower revenue collection. The gross debt to GDP ratio is expected to stabilise at 75.5% of GDP in the 2025/26 fiscal year, slightly above the 75.3% estimated in February. Click here for our client comment on the MTBPS.
The trade balance recorded a surplus of R12.8bn in September, up from a downwardly revised surplus of R5.11bn in August and significantly exceeding expectations of a R7.05bn surplus. Exports grew by 3.5% m-o-m to R170.7bn in September, led by a 29% growth in the shipment of vehicles and transport equipment, while imports fell by 1.3% to R157.9bn.
Meanwhile, private sector credit extension decelerated from 4.95% in August to 4.63% in September. However, it was above the expectation of 4.24%. On the other hand, the annual money supply (M3) rose 7.25% in September from 6.11% in the previous month.
We have recently launched the beta version of the BER Data Playground. To showcase the data available on the Playground, we will regularly publish a chart in the Weekly.
In September 2024, SA's nominal credit card extensions surpassed R48.0 billion, with monthly transactions holding steady at approximately 70 million. Looking at the graph, we can see that since January 2021, growth in total credit card value has outpaced transaction volume. This trend suggests an increased average spend per transaction. This pattern may reflect South Africans' higher reliance on credit for purchases amid rising costs and constrained household budgets.
The US economy expanded by an annualised 2.8% q-o-q in Q3, down from 3% in the prior quarter and a fraction below consensus. The main growth driver was the continued strength in consumption spending, rising at the fastest pace (3.7% q-o-q in Q3 vs 2.8% prior) since 2023Q1. Government spending also held up firmly, while net trade weighed less on economic activity compared to the previous quarter, owing to stronger export growth.
Meanwhile, core personal consumption expenditure (PCE), the Fed's preferred gauge of underlying inflation, rose by 0.3% m-o-m in September, up from 0.2% in August. Despite this afternoon’s jobs report likely reflecting a weakening in employment owing to the recent strikes and storms in the US, we do not see them dialling back on their monetary policy stance. Subsequently, we are pencilling in a 25bps cut for next week’s Fed meeting
According to Eurostat, Eurozone (EZ) real GDP registered a 0.4% q-o-q expansion, overshooting expectations that it would remain unchanged at 0.2% in Q3. Among the different countries, Spain continues to outperform and grew at the fastest pace. The French economy was mostly boosted by the Paris Olympic games over the summer, which masked the underlying weakness in the economy. Surprisingly, Germany eked out economic growth and managed to skirt a technical recession, i.e. two consecutive quarters of contraction. However, the EZ’s largest economy is struggling to gain real momentum, with expectations that it is likely to contract for the second consecutive year with significant downward pressure emanating from the automotive industry.
Staying in the EZ, the preliminary annual consumer inflation print quickened to 2% in October from 1.7%. This was higher than expected. Upward price pressures came from stubborn service inflation, which remained unchanged at an elevated 3.9%, as well as food prices picking up pace in October (2.9% vs 2.4% previously). Downward price pressure emanated from energy prices. Core inflation, which excludes volatile food and energy prices, remained steady at 2.7% in October. The uptick in consumer inflation will support ECB president Christine Lagarde's recent comments in an interview that the fight against inflation is not done. Nonetheless, we still expect that the ECB will cut by 25bps in the upcoming December meeting.
Following five consecutive months of contraction, the official NBS manufacturing PMI surprisingly returned to expansionary terrain and rose to 50.1 points in October from 49.8 previously. The production index improved while new sales orders fared better domestically compared to a slightly downbeat demand on the external front. The pick-up in business activity provides anecdotal evidence that the ramp-up in policy-driven stimulus announced in late September is beginning to filter through. Encouragingly, the fewer working days in October, owing to the week-long public holiday, did not detract from this month’s PMI print as it historically has the tendency to do so. The Caixin manufacturing PMI, similarly, echoed an upbeat policy-driven boost story for October and came in at a better-than-expected 50.3.
Finally, the Bank of Japan (BoJ) decided to keep the benchmark interest rate on hold at 0.25%. Forward guidance from the BoJ has resulted in more uncertainty around further rate hikes in the short term. However, the BoJ acknowledged that the economy has developed in line with their expectations, and the recent uptick in service inflation (stemming from wage increases) should keep a December rate hike on the table. On the political front, the ruling Liberal Democratic Party fared poorly in the weekend’s snap election, losing its outright majority. Negotiations for a new coalition will likely see more political parties being brought into the fold.
Editor: Lisette IJssel de Schepper
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, 01 Nov 2024
