Weekly economic wrap: strong retail sales while the rand keeps slipping

The past week brought good news in the form of strong retail sales and a record-high gold price, but the rand has continued to disappoint as it slipped against the US dollar.

Tracey-lee Solomon, economist at the Bureau for Economic Research (BER), points out that the South African Reserve Bank (Sarb) had to downwardly revise its inflation forecasts in its biannual Monetary Policy Review (MPR) due to faster-than-expected deflation, driven by food and fuel.

“As headline inflation eases, the Sarb is now focused on tracking the second-round effects of inflation, including core inflation and inflation expectations. The Sarb also flagged that the two-year ahead inflation expectation remains above its preferred target.

“In addition, ongoing risks stem from volatile supply-side inflation, particularly from geopolitical factors affecting oil prices and domestic administered price pressures.”

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The rand slipped against stronger dollar

While the US dollar surged to an 11-week high, driven by strong retail sales and lower-than-expected jobless claims, signalling a robust economy, the rand slipped against the stronger dollar. The local currency also lost ground to both the euro and the UK pound amid more risk-off sentiment, as seen in EM bond yields and the gold price, she says.

Bianca Botes, director at Citadel Global, says the South African JSE Index edged slightly lower as local traders awaited corporate earnings reports for further clues on the global economy.

“The rand weakened to R17.74/$. The rand has been under pressure due to a combination of factors, including China’s weak stimulus response and repositioning by investors who expect a more gradual Fed rate-cutting cycle. As a commodity-driven currency, the rand is particularly sensitive to fluctuations in global demand, especially from China, South Africa’s largest trading partner.

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, also noted that the rand slipped against the firmer dollar on Thursday amid robust US economic data. The local currency traded at R17.6/$, down by 1.5% compared to the previous week.

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Gold shines and oil stabilises

“The gold price hit another record high due to geopolitical tensions and prospects of further US Federal Reserve rate cuts,” Solomon says.

The Brent crude oil price fell by 4.9% this week as Israel’s announcement that it would not target Iranian oil facilities eased concerns about supply disruptions. In addition, Solomon says, OPEC’s downward revision to its 2024 and 2025 demand growth forecasts contributed to the decline. “Separately, the UK imposition of sanctions on Russian oil and LNG vessels did little to pressure the market.”

Botes says oil prices steadied on Thursday after a four-day slump, with Brent crude holding above $74/barrel. “Traders remained cautious amid the conflict in the Middle East and disappointing economic news from China. While Israel signalled it would avoid striking Iran’s crude facilities, US airstrikes on Iran-backed rebels in Yemen kept tensions high in the region.”

She points out that gold continued its rally, reaching a record high of above $2,700/ounce. “The demand for safe-haven assets remains strong amid geopolitical uncertainties and recent moves by central banks.

“Despite the rising US dollar and Treasury yields, gold remains attractive to investors seeking a hedge against market volatility. Disappointing economic measures from China, particularly its lacklustre fiscal response to the ongoing property crisis, also added to the allure of gold as a safe-haven asset.”

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South Africa’s credit market waking up?

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say South Africa’s credit market exhibited a mixed performance in the second quarter, reflecting growth as well as challenges for consumers.

According to the latest National Credit Regulator data, the total value of new credit granted increased by 5.5%, reaching R139.8 billion. However, this was a 1.6% decline compared to the same period in 2023, they say.

“While this growth suggests resilient borrowing demand, a high rejection rate of 68.03% indicates stricter lending standards due to economic uncertainty.”

A significant driver of credit growth during the reference quarter was a rebound in mortgage lending, which increased by 18.9%. Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say this suggests renewed confidence in the housing market, supported by easing political uncertainty and anticipated interest rate cuts.

“Despite this quarterly surge, the overall year-on-year decline of 4.6% points to a housing market that is recovering rather than outperforming. While lower interest rates could boost mortgage demand, stricter lending criteria and high default rates remain obstacles.”

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Concerning trend in unsecured credit

Secured credit, which includes vehicle finance, remained relatively flat with a 1.0% increase although credit for furniture and other durables delivered another quarter of strong performance, rising by 9.2%.

Meanwhile, unsecured credit declined by 0.3%, reflecting growing lender caution about consumer financial health, Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say. “Interestingly, short-term credit, a segment typically used by consumers for smaller, immediate needs, increased by 3.4% compared to the previous quarter and by an impressive 31.9% compared to a year ago.

“This suggests that more consumers are turning to short-term loans, possibly due to limited access to other forms of consumption credit. While short-term loans can provide quick relief, they often carry higher interest rates, raising concerns about debt sustainability for households already under financial pressure.”

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Retail trade sales

According to Statistics SA, real retail trade sales increased by 3.2% in August, surpassing expectations of an increase of 2.3%. This followed a downwardly revised 1.7% expansion in July. The largest contribution to the annual figure came from general dealers (up 4.6%, adding 2.1% pts). Seasonally adjusted retail sales increased by 0.5% after a 0.2% decline in the month before.

In the wholesale sector, sales decreased by 14.6% in August, continuing a downward trend that has now stretched for 12 months, Nomvuyo Moima, economist at the BER, says. On a monthly basis, real wholesale trade sales were 5.3% lower in August compared to July.

Meanwhile, real motor trade sales declined by 2.4% after a modest 0.2% rebound in the previous month. The biggest drag came from sales of accessories (-7.9%) and new vehicle sales (-4.9%). However, Moima says it is encouraging that used vehicle sales increased by 7.5%, making it the only positive contributor for a second straight month.

Monthly real motor trade sales remained unchanged in August, following a 0.5% m-o-m gain in July.

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Retail sales data bodes well for GDP

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the latest retail sales data bodes well for gross domestic product (GDP) figures for the third quarter and shows momentum is steadily building.

“Household expenditure growth in the second quarter exceeded our expectations, providing the biggest boost to real GDP. Moreover, third-quarter consumer confidence survey data shows that households are more optimistic about the South African economy and their financial positions, signalling an increased willingness to spend.”

Van der Linde says buying activity is increasing gradually in the third quarter and is expected to gain stronger impetus heading into the fourth quarter, as the favourable impact of lower interest rates and once-off access to a portion of individuals’ retirement savings after the two-pot retirement system took effect on 1 September starts to come through.

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Better consumer environment and retail sales expected for rest of 2024

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say this outcome adds credence to their view of a better consumer environment in the second half of the year, aided by declining fuel costs, uninterrupted energy supply since March and recovering consumer sentiment.

“Despite these positive developments, the broader consumer environment remains challenging. High unemployment rates and restrictive credit conditions continue to limit consumer spending power. However, the medium-term outlook is more encouraging.

“As inflation subsides and interest rates gradually decline, consumers can expect to see increased discretionary income, supporting their spending. Furthermore, the easing of domestic political uncertainty should contribute to stronger asset prices, bolstering consumer balance sheets.

Matshego and Nkonki noted that the upturn was broad-based, with only hardware, paint and glass retailers reporting negative growth rates. “Retail sales are steadily trending upward, suggesting it has turned the corner in light of lower prices. We should see this trend gathering momentum as prices stabilise around the midpoint of the SARB’s target.”