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Tracey-lee Solomon
In contrast to the busy release calendar of next week, this week was relatively quiet on the domestic and international front as far as data releases are concerned. Locally, SA producer prices declined in October on both a monthly and an annual basis. While monthly declines have occurred for the past five months, this was the first annual drop in 2024. Lower producer prices should filter through to consumer inflation and keep the case for interest rate easing. Meanwhile, the SA Reserve Bank’s leading business cycle indicator showed m-o-m growth in September, recovering from August’s decline. For a detailed analysis of this week’s local data, refer to the domestic section.
In the US, the Federal Reserve’s (Fed) preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, came in in line with expectations, showing a modest uptick in price growth. Despite the acceleration, analysts believe inflation remains on a downward, albeit bumpy, trend, and markets are still pricing in a 25bps rate cut in December. In the Eurozone (EZ), sentiment worsened as German business and consumer climate indicators fell. Concerns about more Chinese competition and potential tariffs worried manufacturers, while consumers expressed concerns about job losses. The international section covers the US PCE and German sentiment in more detail.
Moving to the week's news headlines, on Tuesday, the International Monetary Fund (IMF) shared feedback on its 2024 Article IV consultation with SA, covering the macroeconomic outlook, fiscal policy, and monetary policy, among other topics. While the IMF noted improvements in post-election confidence and reduced load-shedding, it flagged downside risks from global disruptions, such as protectionist policies, ongoing conflicts, and slower global disinflation. Domestically, reform delays were flagged as the main downside risk. SA’s precarious fiscal position was also highlighted (again). The IMF called for more ambitious fiscal consolidation and recommended 1% of GDP annually over three years to achieve a primary surplus to stabilise debt at 60%-70% of GDP within a decade. Recommendations included a fiscal rule anchored in a debt ceiling, which would help consolidation and policy credibility. The IMF also recommended enhanced fiscal frameworks and independent compliance oversight. Lastly, the IMF praised the appropriateness of the SARB’s inflation targeting.
Global headlines were dominated by US-instigated international trade concerns. President-elect Donald Trump proposed sweeping tariffs on Canada, Mexico, and China, the US’s three largest trading partners. Trump has stated that he would implement a 25% tariff on all goods imported from Mexico and Canada in response to the flow of illegal drugs and undocumented migrants across the US border. He also pledged to place an additional 10% tariff on Chinese goods to stop the flow of fentanyl into the US. The announcement weakened the Canadian dollar, Mexican peso, and Chinese yuan.
Additionally, on Tuesday, the minutes from the Fed’s November meeting revealed that officials supported gradual rate cuts amid strong GDP growth and moderating job gains. Although consumer price inflation is well below recent highs, the underlying strength of the economy, geopolitical risks and supply chain disruptions could slow the decline going forward. The Fed is still widely expected to deliver a third rate cut in December. However, the path for interest rates is less clear next year.
In markets, the US holiday on Thursday meant that currency movements were benign. The euro strengthened slightly against the US dollar. This was despite the greenback appreciating at the start of the week. Unfortunately, the rand lost against all the major currencies last week.
Global bourses showed mixed performances last week. In SA, the JSE Alsi dropped almost a full percentage point in a somewhat difficult week for emerging markets, but the US’s S&P 500 rose last week. Investors were particularly optimistic about Trump’s nomination for Treasury Secretary, Scott Bessent, late on Friday. Bessent is a hedge fund manager and, as such, is seen as pro-business. The UK’s FTSE 100 and Germany’s DAX also posted gains. In Asia, Japan’s Nikkei 225 rose while China’s Shanghai Stock Exchange declined. The latter is being affected by Donald Trump’s many tariff promises.
Oil prices declined last week as Israel and Hezbollah reached a ceasefire agreement. Although the agreement still appears fragile, the pause in fighting has lowered the risks of further escalation in the Middle East for the time being. In addition to reduced Middle East risk, data from the US showed that demand for gasoline was weak in the lead-up to Thanksgiving. US gasoline stocks rose significantly last week, countering expectations of a small draw. Elsewhere, OPEC+ delayed its production policy meeting. The group is expected to delay an oil output increase. A delay has likely been factored into current prices, but the extent of the delay could impact oil prices. Finally, it was a difficult week for precious metals. Both gold and platinum registered declines of 1.1% and 2.6% respectively.
Next week is busy on the domestic data front, with the spotlight on Q3 GDP growth. After flat growth in Q1, the economy showed a modest recovery in Q2. We expect quarterly growth to come in at 0.2% - 0.4% in Q3, with lingering uncertainty about the volatile agriculture sector and the difficult-to-measure tertiary sector. High-frequency data from Stats SA indicates expansions in mining and construction but contractions in manufacturing and trade. Possible revisions to Q2 GDP figures may also impact the Q3 growth rate.
Several key releases that will provide input on Q4 are also due next week. On Monday, the Absa PMI for November will be published. The manufacturing PMI has been volatile, but, encouragingly, September and October posted two consecutive months where the PMI was above 50 index points, signalling m-o-m expansions. Wednesday brings S&P Global’s PMI, which includes services sector data, while naamsa will release November vehicle sales on Monday. October vehicle sales were particularly strong, marking the best month of 2024.
The FNB/BER Consumer Confidence Index (CCI) will shed further light on Q4 sentiment. Confidence has improved over the past three quarters, bolstered by lower petrol prices and inflation in general, the SARB’s interest rate cuts in September and political stability following the formation of the GNU. With the implementation of the two-pot retirement system providing a boost to spending abilities, conditions are notably better than a year ago.
Globally, attention will be on China and the US. China’s November Caixin PMIs for manufacturing and services are anticipated to show a continued contraction in manufacturing and an expansion in services. In the US, key employment data will take centre stage. The Bureau of Labor Statistics (BLS) will release October job openings data on Monday. The data revealed a steep drop in September, and the overall downward trend this year shows that the labour market is cooling. Nonfarm payrolls data for November will be released on Friday. The economy added just 12 000 jobs in October, the weakest since December 2020. Weakening labour market data could reinforce expectations for a December Fed rate cut.
In the EZ, it is a quieter week. On Thursday, we will receive the October retail sales figures. In addition, Eurostat will release the third estimate of Q3 GDP growth. The second estimate was in line with the first and revealed a 0.4% q-o-q expansion, with the biggest economy, Germany, expanding. The third estimate is not expected to offer any surprises
This week, two briefings provided more information on the progress of electricity reform and the outlook for load-shedding in 2025. To start, the Ministry for Electricity and Energy noted that 26 November 2024 signified the longest stretch of uninterrupted power supply in five years (245 days). The financial year-to-date (Apr to Nov 2024) energy availability factor was 63.1%, compared to the previous year's 55.5%. Eskom customers also had to upgrade their meters, which increased the total customer base by 341 000 to 7.2 million.
Furthermore, the Department of Minerals, Resources and Energy (DMRE) is developing a new, improved Integrated Resource Plan (IRP) that guides electricity policy. It held public workshops this past week. IRP2024, which will replace IRP2023, includes a substantially different baseline case and scenarios.
The new IRP still has some concerning aspects. First, it assumes only moderate demand growth of 1.5% to 2% over the long term. This assumes that economic growth will remain energy efficient. Second, the energy mix assumes a strong increase in rooftop solar (an increase from the current 5.9 GW to 11.3 GW) and 6 GW of combined cycle gas turbines. In contrast, there is only 7.8GW of utility-scale solar PV and 7.2 GW of wind. This is low given the relative cost of utility-scale solar versus other options. The remaining demand will be filled by storage and the completion of Kusile. There is still a “power cliff” in 2030, which DMRE expects to be filled by slower decommissioning.
The plan also notably indicates a substantial reduction in carbon emissions by the electricity sector from current levels of 200 mT of CO2 to 100 mT by 2040. In addition, there will also be a significant reduction in water consumption from 220 Ml to 60Ml. Renewable energy consumes substantially less water than coal, where water is needed for cooling, some studies suggest solar electricity uses 1 to 2 % of the water required for coal and natural gas electricity generation. This underscores the positive benefits of a shift from coal to renewables.
Based on these assumptions, load-shedding is unlikely to return in 2025. However, a significant economic rebound, especially if more energy-intensive, could create renewed electricity shortfalls.
Nomvelo Moima
Headline producer price inflation (PPI) for final manufactured goods slowed to -0.7% y-o-y in October, down from 1% in the prior month. This deceleration was slightly greater than expectations, largely driven by a decline in fuel prices. On a monthly basis, PPI inflation eased from -0.3% to -0.7% in October (below consensus).
The SARB’s composite leading business cycle indicator ose by 0.9% m-o-m in September, reversing a 0.7% m-o-m decline in the prior month. Four of the eight available components showed growth, with the largest positive contributors being an acceleration in the six-month smoothed growth rate of the real M1 money supply and a rise in the number of residential building plans approved.
Nkosiphindile Shange
The US Bureau of Economic Analysis (BEA) data showed that the PCE Price Index edged higher to 2.3% y-o-y in October, from 2.1% in September. The core PCE Price Index, which excludes volatile food and energy prices, came in at 2.8% in October, up from 2.7% in September. On a monthly basis, the core PCE increased by 0.3%. All the inflation data was in line with expectations. The data shows that inflation remains moderate but sticky, with an increase in the services sector prices.
The Ifo Business Climate Index for Germany decreased to 85.7 in November, down from 86.5 in October. The index reflects a decline in business confidence in the German economy in general across all sectors, with the biggest drag from the severely constrained manufacturing sector. This sector has been facing increasing energy prices and fears further competition from China. German companies are becoming more pessimistic about future business conditions as long as the manufacturing sector continues to deteriorate. The Gfk Consumer Climate Indicator fell to -23.3 points going into December 2024. This is the lowest reading since May, and it is significantly below the forecast of -18.6 points. This was driven by the sharp fall in income expectations, falling by 17.2 points to a nine-month low of -3.5 points as recession fears grow. Proposed industrial layoffs and increasing insolvencies have heightened uncertainty, reduced growth forecasts and increased unemployment. The Gfk growth forecasts for 2024 and 2025 remain a modest 0.4%.
Editor: Lisette IJssel de Schepper
Email: lisette@sun.ac.za
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Please refer to the glossary on the BER website for explanations of technical terms.
Friday, 29 Nov 2024
