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This week was relatively quiet on the economic front, but there was good news for the South African economy with economic activity picking up, although manufacturing is still battling. The week started off with global panic when global markets fell sharply.
Economic activity slacked in June although the South African economy is expected to grow in the second quarter. Even at its index level for June, economic activity was 1.6% higher than in March, a strong signal that economic performance surpassed the first quarter’s results and will lead to a positive outcome for the next quarter.
According to BankservAfrica’s Economic Transactions Index (BETI), that measures the value of all electronic interbank transactions BankservAfrica processes at seasonally adjusted real prices, economic activity moderated in June, but economic growth for the second quarter is expected to be in positive territory.
“The BETI reached an index level of 135.8, slightly down by 0.5% from the 136.4 recorded in May. Since the end of March, South Africa has been free from load shedding, creating a more productive economic environment. Additional activity relating to the election in May also stimulated economic activity in recent months,” Shergeran Naidoo, BankservAfrica’s head of stakeholder engagements, says.
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He believes a likely reduction in temporary employment post-election, along with uncertainties around the election outcome and the establishment of a new political dispensation for South Africa, contributed to the slackness in economic activity during June.
Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say global markets were spooked by the weak labour market data that pointed to a faster-than-expected slowdown in the US, with expectations of a US recession increasing significantly.
“Emerging market assets fell across the board as global risk aversion surged, while the yen carries trade (borrowing in the low-interest rate Japanese market and investing in the higher yield markets) unwound. The VIX, a gauge of global market volatility, jumped to its highest level since February 2020, when it was hit by worries about the economic impact of the Covid-19 pandemic.”
The rand closed at R18.4/$ against the dollar on Wednesday, while the dollar remained well-supported, driven primarily by selling pressure on the Japanese yen following the Bank of Japan’s cautious outlook. The rand traded at R18.30/$ on Friday afternoon.
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Matshego and Nkonki point out that the local equity market dipped as investors dumped risky assets, with the JSE All Share Index recording significant losses across all its components.
“US stocks plunged at opening on Monday, ending the session sharply lower before rebounding on Tuesday. Overall, markets are still down for the week, failing to sustain a comeback from Monday’s selloff.”
Brent crude oil prices fell early in the weak on global growth concerns, while gold and platinum prices also dipped on growth worries.
In South Africa, this week statistics from Stats SA showed that manufacturing production contracted by 5.2% in June from a revised fall of 1.2% in May. “The outcome was worse than our forecast of -0.8% and the market consensus of -0.9%. The result comes off a high base but the extent of the weakness is surprising given the absence of power shortages.”
Matshego and Nkonki say this indicates that underlying operating conditions remain challenging within a subdued domestic and global environment.
However, the manufacturing industry managed to grow over the second quarter, increasing by 0.9% and recovering from its 1.2% contraction in the first quarter, while six of the ten divisions posted positive growth rates.
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The most significant positive contribution stemmed from motor vehicles, parts and accessories and other transport equipment and basic iron and steel.
“The improvement in electricity production should offer continued upward impetus to manufacturing for the remainder of the year with further support from the recovery in domestic and global demand as the year progresses, given the moderation in inflation and more broad-based monetary policy easing,” Matshego and Nkonki say.
Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say the sharp fall in total manufacturing production was already reflected by the manufacturing PMI business activity, which remained in contractionary territory at 36.3 points during the same month.
“Manufacturing output expanded by 0.9% in the second quarter after shrinking by 1.2% in the first quarter. This supports our long-standing view that GDP likely rebounded in the second quarter. In addition, the significant annual decline in manufacturing output is consistent with our slightly below-consensus GDP growth forecast of 0.9% for 2024.”
Overall, they say, the weak manufacturing output performance, despite easing energy and supply chain constraints, underscores the lacklustre demand for manufactured products.
South Africa’s foreign exchange reserves for July increased to $62.3 billion from $62.1 billion in June. The increase was supported by higher gold reserves and SDR holdings, while foreign exchange reserves declined. Foreign exchange payments were made on behalf of government, including a partial repayment of a foreign exchange loan from the International Monetary Fund.
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