Weekly economic wrap: manufacturing and inflation expectations

On the economic front the past week again had a mixed bag of positive and negative results, with manufacturing growing a bit, but mining still declining, while inflation expectations supported the hope that the Reserve Bank will cut the repo rate next Thursday.

The rand lost some ground against all major currencies over the past week, particularly the US dollar, which strengthened against the euro. The slight depreciation was in step with movements in other emerging market currencies, Tracey-lee Solomon, economist at the Bureau for Economic Research (BER), says. The local currency was trading at R17.77 on Friday afternoon.

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say the rand strengthened this week against a weaker dollar that plunged to its weakest level after the highly combative presidential race debate saw Kamala Harris gain an edge over Donald Trump.

“A Trump win is viewed as dollar-supportive, given the former president’s plans to preserve the expansion of tax cuts and increase tariffs, which would increase inflation, likely impact interest rate cuts and consequently strengthen the greenback.”

Solomon points out that among South Africa’s export commodities, the gold price registered a weekly gain of 1.7% to hit a closing record high. Gold was trading at $2 567.91 per ounce on Friday afternoon.

Solomon says the gold price was buoyed by further confidence that the US Fed will cut interest rates on Wednesday next week. “Gold offers a more attractive return as yields related to US rates decline.”

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Is manufacturing starting to shine?

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say manufacturing output, not seasonally adjusted, increased by 1.7% in July, rebounding from a 5.5% contraction (previously -5.2%) in June.

According to Statistics SA, seasonally adjusted output volumes expanded by 2.1% compared to the previous month after a 0.4% decline in June, signalling a positive start to the third quarter of 2024. They say this aligned with the improvement in the PMI business activity index, which rose to 50.8 points from 36.3 in June.

Year-to-date (January to July), output remains lower by 0.4% compared to the same period last year, weighed on by weaker production in the automotive, basic iron and steel and furniture divisions.

Nomvuyo Moima, economist at the BER, the increase in manufacturing production surprised to the upside in July, beating expectations of a modest 0.7% increase. The largest positive contributor was food and beverages (up 9.5%).

In contrast, production of motor vehicle parts and accessories weighed the most on output (down 12.1%). She also says this rebound was foreshadowed by the July Absa PMI, which signalled a strong start to the third quarter after a weak May and June.

Matshego and Nkonki say the outcome was better than their forecasts and the market consensus. “The absence of load shedding contributed to the improvement in production within the context of a still challenging operating environment and subdued domestic and global demand.

“The improvement in electricity production should offer continued upward impetus to manufacturing for the remainder of the year. Given the moderation in inflation and more broad-based monetary policy easing, the anticipated recovery in domestic and global demand will offer further upside support.”

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Mining continues to lose its shine

Moima says there was less positive news in the mining sector as production declined by 1.4% in July, following a downwardly revised 3.6% drop in June compared to a year ago. The biggest drag came from iron ore (-19%, shaving off 2.8% pts) while manganese ore (up 27%, adding 2% pts) and chromium ore (+23.3%, +1% pts) made positive contributions to the annual figure. On a monthly basis, mining production shrunk by 0.9% in July after a 1.7% contraction in the month before.

Jee-A van der Linde, senior economist at Oxford Economics Africa, points out that the mining sector detracted from second-quarter gross domestic product (GDP) and that is likely to be the case in the third quarter as well.

“Despite stability in the national electricity grid and increased business confidence since the formation of the Government of National Unity (GNU) in June, South Africa’s mining output has remained in a long-term decline since the global financial crisis due to softer global demand for South Africa’s commodities, logistical and infrastructural constraints and political uncertainty.

“It will take several quarters for the sector to reap the benefits of improved power supply and the possible efficiencies of the new government. Meanwhile, the ongoing economic weakness in China and elsewhere is constraining non-gold commodity prices, keeping the sector under pressure.”

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Building confidence looking up

The FNB/BER Building Confidence Index gained five points to reach a level of 40 in the third quarter.

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say all industries along the building value chain recorded improved sentiment, except quantity surveyors and building contractors. “Underpinning the better business mood were signs of increased activity and sales across the building value chain.

“Production of building materials also improved, while production costs eased. The residential building sector continued to underperform in the third quarter, while work for non-residential builders showed a noticeable improvement.”

They point out that it is important that the building pipeline suggests there is good cause for optimism regarding the medium-term prospects for the building construction sector but delays in municipal approvals and crime and extortion continue to hinder project rollouts.

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Inflation outlook is good news for repo rate

Average expectations for headline inflation for 2024 declined to 5.1% in the third quarter, from 5.3% in the second quarter. Over the 2025 to 2026 forecast horizon, analysts, business people and trade unions now expect inflation to average 4.8%.

Moima says this was mainly driven by analysts who expect the lowest inflation rate over the entire forecast horizon. At 4.8%, average five-year ahead inflation expectations were marginally lower than the 4.9% expected in the second quarter.

In contrast, household inflation expectations moved to their highest level this year in the third quarter, ending the downward trend that started in the middle of 2023. Households’ one-year expectations rose from 6.4% in 2024Q2 to 6.9% in 2024Q3, while their five-year expectations increased from 9.7% to 10.6%, the highest since the second quarter of 2023.