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This week the economic focus was on monetary policy, while there was also good news about manufacturing PMI and a modest gain in new vehicle sales. The rand also ended the week on a firmer note.
Craig Lemboe, deputy director at the Bureau for Economic Research (BER), notes that the US Federal Reserve (Fed) on Wednesday decided to keep the US Federal Funds rate unchanged, although two other major central banks changed their monetary policy settings unexpectedly.
The Bank of Japan hiked its benchmark rate to “around 0.25%,” marking the second increase this year in response to a weaker yen, while, the Bank of England moved in the opposite direction, cutting rates for the first time since 2020.
However, Lemboe says the prevailing view is that the Fed will cut rates soon too, especially after comments by Fed chair Jerome Powell at the post-announcement press conference. “Our forecast is that monetary policy easing can be expected to start in September.”
David Fowkes, member of the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) and advisor to the governor noted at the BER conference on Wednesday that monetary policy in SA is restrictive.
“This supports our call for a repo rate cut in September. The director-general of the National Treasury, Duncan Pieterse, also shared some insights, from the fiscal policy side, reiterating their commitment to stabilising debt and debt service costs. Importantly it seems that the push to address the “binding constraints” to growth is gaining momentum.”
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Nkosiphindile Shange, economist at the BER, says the Absa PMI increased by 6.7 points to 52.4 in July 2024, up from 45.7 in June 2024, reflecting a solid start to the third quarter following a weak May and June.
“The survey results show domestic and global demand picked up, filtering through to higher activity. Demand has struggled recently and manufacturers could not exploit the stable electricity supply to its full potential.”
He also notes that the trade balance recorded a surplus of R24.23 billion in June, after a surplus of R20.09 billion in May and exceeding expectations of R18.4 billion. This is the largest surplus since May 2022, as imports declined by 6.5% compared to the previous month, while exports declined by 3.4%.
Meanwhile, Sarb data showed that money supply grew by 4.2% compared to a year ago in June, from 4.7% in May and below the expected 4.7%. Credit extension to the private sector was largely flat at 4.3% in June, above expectations of 4%.
According to the National Association of Automobile Manufacturers of South Africa (Naamsa), new vehicle sales grew by 1.5% in July, following a sharp decline of 14% in June. This translates to an increase of 657 units from the 43,572 vehicles sold in July 2023. However, year-to-date sales are still down more than 6% compared to the same period last year.
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Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, said the improvement in Private Sector Credit Extension (PSCE) accelerating to 4.3% in June, up from 3.9% in May, was driven by corporate credit, which expanded by 5.1%. Within corporate credit, vehicle asset finance surged to 16.7%, the fastest pace since April 2014, compared to 9.9% in May.
Household credit growth slowed marginally to 3.3% in June, from 3.4% in May, the weakest pace since March 2021, Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say. Within household credit, asset-backed credit continues to show mixed trends: car finance increased to 6.3% from 6.2%, while home finance dipped to 2.7% from 2.8%.
About the trade balance, they say the decline in imports has been broad-based across major merchandise categories despite a less depreciated rand, reflecting subdued domestic demand. While the reduction in imports signals weakness in the import sector, they think it also suggests a moderate widening of the current account deficit to 2.0% of GDP from 1.6% in 2023, better than earlier projections.
“The increase in the Absa PMI suggests that the demand that was put off due to policy uncertainty is now supporting the market and is compounded by export sales. Furthermore, purchasing prices continued to ease, partly reflective of lower fuel prices. However, supplier delivery times are worsening, suggesting that supplier ability to manage rising demand is limited. This could stifle performance going forward, as optimism on near-term conditions continues to rise.”
Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say the cessation of load shedding, continued launches of new products, a stronger Rand and the expectation of lower interest rates should support the market going forward for new car sales.
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Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, noted that the Rand got some support as the US dollar retreated after Powell’s strong hint that a US interest rate cut was on the table in September. “This morning, the local currency was trading at R18.21/$.
Regarding the trade surplus, they expect the trend of exports outweighing imports to continue, with the trade surplus remaining intact for the remainder of the year. “Exports will likely be supported by ongoing improvements in domestic operating conditions and firmer global demand driven by lower inflation and softer monetary policy. At the same time, imports will remain under pressure, kept in check by weak domestic demand, particularly subdued fixed investment.”
Matshego and Nkonki say growth in household credit softening reflects the impact of higher interest rates, weak labour market conditions, subdued earning prospects and tighter lending standards among commercial banks.
“We expect credit growth to remain relatively subdued during the third quarter as the economic environment remains relatively weak. We still expect the first rate cut of 25 basis points in September, followed by another 25 basis points reduction in November.
“This implies that households will only receive some, albeit modest, relief towards year-end,” they say.
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Bianca Botes, director at Citadel Global, says the three major central banks found themselves at a crossroads this week, faced with the daunting task of balancing economic growth with inflation control in their monetary policy. Their decisions painted a picture of a global economy grappling with divergent challenges.
“The different paths of these central banks reflect the unique economic challenges each country faces. The US is grappling with a slowing economy and persistent inflation, while the UK is balancing the need for economic stimulus with inflation risks. On the other hand, Japan is focused on normalising monetary policy after years of ultra-loose conditions.”
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