Economic performance of the global economy, as well as our local economy, is always top of mind when we evaluate the outlook for growth, employment and financial market performance. This week’s South African Reserve Bank (SARB) Quarterly bulletin provides an in-depth look to the local economy.
Key themes for this week include:
- SARB Quarterly bulletin points to sluggish growth and easing inflation
- United States (US) gross domestic product (GDP) overshoots expectations
- Hawkish central bankers cause market jitters
- Equities trade mostly sideways
SOUTH AFRICA AT A GLANCE
When looking at South Africa, we often discount the significance of its economy to the rest of Africa and even the world. The South African economy, however, holds notable importance in the global context for several reasons:
- Natural Resources: South Africa is rich in natural resources, including minerals such as gold, platinum, and diamonds. The country’s resource wealth contributes to global supply chains and industries, making it an important player in the global mining sector.
- Regional Economic Hub: South Africa serves as an economic hub for the region. Its stability and infrastructure often make for an attractive destination for foreign investment and regional trade. As such, its local economic performance has implications for neighbouring countries and the overall economic integration of Africa.
- Trade and Investment: South Africa has extensive trade relationships with various countries around the world. It is a member of BRICS (Brazil, Russia, India, China, and South Africa) and plays a vital role in fostering economic cooperation among these emerging economies.
- Financial Sector: South Africa has a well-developed and sophisticated financial sector, with Johannesburg being the financial hub of Africa. The country’s financial institutions play a significant role in facilitating capital flows, investment, and financial services across the continent.
Given the significance to the African continent, and global environment, Thursday’s SARB Quarterly bulletin warrants a closer look as it serves as a gauge to the overall performance of the local economy. The Quarterly bulletin, highlighted various key points for the first quarter of 2023:
- South Africa’s real GDP expanded by 0.4% in the first quarter of 2023 after a contraction of 1.1% in the previous quarter. The secondary and tertiary sectors experienced growth, while the primary sector contracted further.
- Agriculture output decreased, but horticultural products saw an increase. Electricity load-shedding affected production, especially in the poultry industry.
- Mining sector output increased in five out of 12 subsectors.
- Manufacturing output increased, particularly in food and beverages and petroleum-related products.
- Construction sector activity increased, driven by civil construction and building projects.
- The commerce, personal services, finance, insurance, real estate, business services, and government services sectors all expanded.
- Household consumption expenditure increased, but at a slower pace. Spending on services and durable goods decreased slightly.
- Household debt increased, as well as the cost of servicing debt, due to higher interest rates
- Gross fixed capital formation increased, mainly driven by government spending.
- Employment levels increased, but the unemployment rate also rose.
- Inflationary pressures eased, except for food prices.
- The trade surplus widened, with increased exports of mining, manufacturing, and agricultural products.
- The deficit on the current account of the balance of payments narrowed, and there was a net inflow of capital.
- South Africa’s external debt decreased when expressed in rand terms.
- The nominal effective exchange rate of the rand decreased, impacted by load-shedding and the country’s greylisting.
- Domestic bond yields increased sharply but later declined, and the value of debt securities issued by residents and non-residents increased.
- Money supply growth accelerated due to rising interest rates and increased deposits.
So, while the economy is facing headwinds and sentiment is muted, there are some green shoots to focus on.
DATA IN A NUTSHELL
It was a quiet week on the data front, with key releases only gaining momentum towards the second half of the week.
US GDP data, released on Thursday, indicated that the US economy grew by 2% in the first quarter of 2023, surpassing previous forecasts. Consumer spending showed strong growth, with a 4.2% increase, driven by a surge in spending on durable goods and services. Exports also performed well, growing 7.8%, while imports increased by a slower rate. However, non-residential fixed investment and government spending were lower than expected. The main factors weighing on GDP growth were private inventory investment and residential fixed investment. The US Federal Reserve (Fed) projects that growth will reach 1% for the year. Meanwhile, the number of Americans filing for unemployment benefits decreased by 26,000 to 239,000 in the week ending 24 June, the largest decrease since October 2021. Corporate profits in the United States fell by 5.9% to $2.329 trillion in the first quarter of 2023. This decline, slightly lower than the previous estimate of 6.8%, was the sharpest since the last quarter of 2020. It was mainly attributed to the Fed’s policy tightening. Undistributed profits dropped by 17.5% to $0.678 trillion, and net cash flow with inventory valuation adjustment, which represents funds available for investment, decreased by 0.6% to $3.127 trillion. Additionally, net dividends saw a slight decline of 0.1% to $1.652 trillion.
The economic sentiment in the euro area declined for the second month in a row to 95.3 in June, its lowest level since November 2022 and below market expectations. Factors such as higher interest rates set by the European Central Bank (ECB) and persistent high inflation contributed to the worsening sentiment among manufacturers, constructors, service providers, and retailers. However, there was a slight improvement in consumer morale. In terms of prices, both consumer inflation expectations and selling price expectations among manufacturers decreased. Among the largest economies in the euro area, the economic sentiment indicator deteriorated in Germany, Italy, the Netherlands, and Spain, but improved in France.
Profits earned by China’s industrial firms fell by 18.8% to ¥2,668.89 billion in the first five months of 2023. This decline was due to the stalled economic recovery, weak demand, and margin pressures. It followed a 20.6% drop in the previous period and a 4% decrease in 2022. Both state-owned firms and the private sector experienced shrinking profits. Among the 41 industries surveyed, 24 saw losses, including petroleum, coal, chemical products, and computer and electronic equipment.
The FNB/BER Consumer Confidence Index in South Africa declined to -25 points in the second quarter of 2023, marking its lowest level in a year. This indicates growing concerns about the country’s economic prospects and household finances. The index reading is the second lowest since 1994, highlighting the seriousness of the situation. The survey revealed that consumers anticipate a decline in South Africa’s economic growth in the coming year and perceive the present time as unfavourable for purchasing durable goods. High-income households experienced the most significant deterioration in confidence, which is worrisome for the retail sector as affluent consumers have the greatest spending power. Factors such as potential interest rate increases, rand depreciation, and concerns regarding diplomatic relations have worsened the negative impact of the electricity crisis on high-income confidence, as stated by FNB’s chief economist, Mamello Matikinca-Ngwenya. South Africa’s annual Producer Price Index dropped to 7.3%, in May, down from 8.6% in April, in line with market expectations. This reading represents the slowest rate of inflation since August 2021.
US stocks fluctuated marginally between red and black on Thursday. The upward revision to first quarter GDP growth and a decrease in initial jobless claims supported the argument for the Fed to continue raising interest rates. The banking sector performed well as major banks passed stress tests, while entertainment company, Disney’s stock declined to four-week lows.
On Thursday, the UK’s FTSE 100 declined slightly to 7,483 as investors reacted to a hawkish stance from major central banks. The heads of the Bank of England (BoE), the Fed, and the ECB emphasised the need for further interest rate hikes due to ongoing high inflation numbers. BoE Governor, Andrew Bailey, suggested that borrowing costs in the UK would remain elevated for longer than expected. In company news, luxury goods firm, Burberry shares fell 3.5% due to trading ex-dividend, while B&M Value Retail dropped nearly 7% despite announcing sales growth. Conversely, consulting firm, Serco’s stocks surged almost 6% after raising its full-year profit and revenue forecasts.
European shares made modest gains on Thursday, with Germany’s DAX and the STOXX 600 both rising by around 0.2%. Investors were analysing various economic data, including the eurozone’s business survey, which showed a decline in economic sentiment, despite lower inflation expectations. In Germany, the Consumer Price Index (CPI) for June indicated an increase in inflation, while Spain experienced a modest rise in consumer prices. Central bank leaders in the eurozone, UK, and US maintained their hawkish stance, suggesting ongoing policy tightening. In corporate news, clothing retailer, H&M, reported better-than-expected profits, and car manufacturer, Renault, raised its full-year financial outlook.
On Thursday, Japan’s Nikkei 225 Index increased by 0.12% to close at 33,234, while the broader TOPIX Index declined by 0.1% to 2,296. Japanese shares had mixed performance as hawkish comments from major central banks impacted investor sentiment. Despite this, the benchmark indexes remained near their highest levels since 1990, supported by a weak yen and optimism surrounding AI-related technologies. Technology stocks generally performed well, with gains from SoftBank Group, Advantest, and Tokyo Electron. However, some heavyweight stocks like Toyota Motor, Fast Retailing, and Sony Group experienced slight losses.
On Thursday, the JSE FTSE All Share index remained largely unchanged around 74,835. Global investors remained cautious following recent hawkish statements from central bankers. Mild gains in financials were offset by losses in tech companies like Naspers and Prosus, as well as industrials and financials. Motor manufacturer, BMW, also made a significant investment announcement saying it plans to spend R4.2 billion to produce the next-generation X3 plug-in hybrid in South Africa.
STRONGER DOLLAR DIMS GOLD’S SHINE
On Thursday, West Texas Intermediate Crude futures rose above $70/barrel as investors considered a larger-than-expected decline in US inventories and evaluated the impact of increasing interest rates on global growth and fuel demand. The Energy Information Administration reported a substantial drop of 9.6 million barrels in crude inventories, surpassing market expectations. The positive revision to US first-quarter GDP growth further reinforced expectations of the Fed’s ongoing interest rate hikes to manage inflation. Major central banks reiterated the need for policy tightening, and Saudi Arabia pledged significant output reduction in July, aligning with the broader Organization of the Petroleum Exporting Countries, OPEC+’s agreement to limit supply.
Gold prices dropped below $1 895 /ounce, reaching its lowest level in over three months. This decline was influenced by the rise in government bond prices following the sharp upward revision of US GDP growth. The stronger economic outlook provided the Fed with more leeway to tighten monetary policy, increasing the opportunity cost of holding precious metals.
Copper futures dropped below $3.70/pound, hitting a one-month low due to factors such as a stronger US dollar and concerns about reduced manufacturing demand in light of the current macroeconomic conditions. The lack of specific support from the Chinese government for its struggling manufacturing sector, coupled with the tightening monetary policies of central banks like the Fed, ECB, and BoE, further contributed to the downward pressure on copper prices. Despite these factors, there are concerns among market participants that the supply of copper may not meet the strong long-term demand driven by the transition to renewable resources. Inventories of copper at the London Metals Exchange and the Commodities Exchange remained at low levels, and both Chile and Peru have reported declines in copper output for this year.
Iron ore prices for delivery in Tianjin, with a 63.5% iron ore content, remained near the $115 mark, staying close to a two-month high of $117 seen on 16 June. Market sentiment was influenced by concerns of lower demand, particularly in the Chinese construction sector, while also considering the possibility of stimulus measures from the Chinese government. Recent data highlighted the challenges faced by China in recovering from pandemic-related lockdowns, especially impacting the property sector. The official manufacturing Purchasing Managers Index indicated another contraction in May, along with a decline in imports and lower-than-expected loan growth. As a result, expectations of stimulus measures by Beijing supported demand prospects for iron ore and other ferrous raw materials. Additionally, the People’s Bank of China aimed to alleviate debt struggles among developers by injecting ¥2 billion in liquidity and implementing a 10 basis points reduction in key interest rates.
HAWKISH CENTRAL BANKS WEIGHS ON RISK APPETITE
The dollar index rose to 103.3 on Thursday, reaching levels not seen in almost two weeks. Positive indicators of the US economy, such as higher GDP growth, lower initial jobless claims, and increased consumer confidence, support the case for the Fed to continue raising interest rates. Additionally, results from the stress tests showed major banks are prepared for economic downturns. Traders are now predicting an 87% chance of a 25 basis point rate hike next month, and the likelihood of another increase in September is also rising and is currently standing at nearly 23%.
The euro held steady at $1.09, remaining near the six-week high of $1.10 reached on 22 June, as investors analysed mixed CPI data from major European economies ahead of the eurozone-wide figure expected today. Inflation in Germany picked up to 6.4% in June, while Italy and Spain saw slower price increases. However, concerns persist regarding the ECB’s aggressive policy tightening, which could potentially lead to a recession. The ECB plans to implement two additional rate hikes in July and September, but ECB President, Christine Lagarde, expressed the need for more evidence of sustained inflation before making further decisions.
The British pound has slipped towards $1.26, retreating from its 14-month high of $1.2848 on 16 June. Investor concerns emerged due to the potential risk of a recession following the BoE’s aggressive policy tightening. Governor Bailey emphasised that the interest rate hikes were driven by the economy’s resilience and persistently high inflation, and maintains his hawkish stance. In June, BoE policymakers implemented a larger-than-expected 50 basis point rate increase and expressed their commitment to further tightening measures. Market expectations now point to a peak interest rate of 6.1% by February 2024.
The South African rand dropped to around R18.70/$, reaching its lowest level since 9 June, influenced by a stronger dollar and investor concerns regarding geopolitical risks and global monetary policy. The currency received some support from reduced power outages and President Ramaphosa’s efforts to maintain a balanced stance in the Russia-Ukraine conflict. Additionally, the recent failed rebellion in Russia has raised speculation that President Putin may avoid attending an August summit in Johannesburg, which will remove South Africa from a delicate diplomatic position. When looking at monetary policy, SARB Governor, Lesetja Kganyago, commented that he sees the rand as “undervalued” and anticipates the need for tighter policy for a longer period than what the market has anticipated.
The rand is trading at R18.77/$, 20.39/€ and 23.69/£.
Sources: Trading economics, Refinitiv and the SARB Quarterly bulletin.