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The Rand has risen to its highest level since July 2023 on US dollar weakness this week, but the country’s economy keeps struggling as evidenced by another poor showing on the local industrial data front, with mixed internal trade data.
Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit say the Rand strengthened as the dollar fell on higher expectations of an earlier US interest rate cut. “US retail sales were flat in April, while CPI data was better than market expectations, fuelling hopes for the US Federal Reserve to cut rates earlier, in September compared with November previously.”
The Rand closed at R18.18/$ against the dollar on Thursday and has broadly held on to its gains on Friday.
However, the rest of the economic data does not bring good news. Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER) at Stellenbosch University, says while we still see very subdued quarterly growth, there is an increased possibility that the economy may have stagnated or tipped into a contraction in the first quarter of 2024 compared to the fourth quarter of 2023.
“The margin is likely to be tight. Also, there is still a lot of uncertainty around the ‘hidden’ services sectors and with possible revisions to the fourth quarter (particularly to agriculture), it is difficult to make a firm call.”
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According to Statistics SA, mining production shrank by 5.8% in March compared to a year ago, after an upwardly revised expansion of 10.3% in February. Nkosiphindile Shange, economist at the BER, says this is the steepest contraction since February 2023 and well below expectations.
The biggest drags on production were coal (-9.1% compared to a year ago), manganese ore (-12.2% compared to a year ago), iron ore (-6.8% compared to a year ago) and platinum group minerals ( -3.6% compared to a year ago).
“On a seasonally adjusted basis, production contracted by 5% month-on-month in March, following growth of 5.3% in February and a contraction of 1% in January. This is sad news for gross domestic product (GDP) in the first quarter, as the mining sector contracted by 1.7% quarter-on-quarter compared to an expansion of 2.4% recorded in the fourth quarter.”
Matshego and Nkonki say while the outcome was weaker than expected, it does not come as a surprise given weak global and domestic demand, suppressed commodity prices and generally persistent structural constraints.
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Internal trade data from Statistics SA indicated that real retail trade sales increased by 2.3% in March compared to a year ago, beating the economists’ expectation for 0.4% growth. The largest contribution came from general dealer sales (+6.4% compared to a year ago).
On a monthly basis, sales rose by 1.4% following a 1% gain in February but this was not enough to offset a sharp 3.3% contraction in January and sales were down by 0.9% in the first quarter compared to the fourth quarter.
In wholesale trade, on the other hand, sales declined by 12.5% in March compared to a year ago, contracting for the seventh straight month. On the positive side, a steep 4% month-on-month decline was not enough to cancel out monthly growth recorded in January and February and sales were up 0.4% quarter-on-quarter.
Matshego and Nkonki say it reflects weak consumer demand in a high interest-rate environment. Reprieve is most likely to come toward the end of 2024 as real incomes start to recover from the moderation in inflation.
Motor trade sales decreased by 10.4% in March compared to a year ago on the back of a 7% month-on-month drop. The largest negative contributors were new vehicle sales (-23.7% compared to a year ago), sales of accessories (-9.9% compared to a year ago) and used vehicle sales (-9.3% compared to a year ago). On a quarterly basis, sales declined by 2.9% following 0.9% growth in the fourth quarter.
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Statistics SA’s Quarterly Labour Force Survey for the first quarter released this week also showed that the South African economy is not creating enough jobs, with the official unemployment rate increasing to 32.9% in the first quarter, an increase of 0.8% from 32.1% in the fourth quarter.
Shange says although 22 000 jobs were created between the fourth quarter and the first quarter, this was not enough to absorb the 215 000 new job seekers, mostly students and homemakers, who entered the market in 2024.
“Employment in the services industries will likely stagnate as restrictive monetary policy continues to weigh on domestic demand, hurting confidence, making consumers wary of spending and companies’ unwillingness to undertake fixed investment,” Matshego and Nkonki say.
“At the same time, public sector employment will continue to be restricted by government caps on staff numbers to support necessary fiscal consolidation. While structural constraints have eased since the start of the year, with reduced load shedding and improved transport services, most producers and exporters will probably focus on restoring their profit margins, which were badly depleted by the severe disruptions and surge in operating costs last year.”
Consequently, they expect job creation to remain weak in 2024, with employment drifting sideways. “A more meaningful recovery is likely next year as inflation dips towards 4.5% and the South African Reserve Bank (Sarb) reduces interest rates more significantly, creating space for faster growth in domestic demand and job creation.
“Moreover, agriculture, mining and manufacturing could also increase employment in 2025 as global demand picks up and commodity prices strengthen, but only if the country manages to sustain the improvements in power supply and transport services.”
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Matshego and Nkonki say in commodities, Brent crude oil prices continued to ease on global demand concerns and as markets generally continue to shrug off the ongoing geopolitical tensions. “However, the moderation in prices was partially offset by an OPEC report indicating that member countries exceeded the production cap by 568 000 barrels per day and signs of cooling US inflation.
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