Weekly economic wrap: Inflation shoots the lights out, the repo rate not so much

The past week was quite exciting on the economic front, with inflation decreasing by a full 1%, although it did not change the Reserve Bank’s mind about cutting the repo rate by more than 25 basis points.

On the international front, geopolitical tensions fuelled a rally in safe-haven commodities, Bianca Botes, director at Citadel Global, says. “Gold extended its upward streak, surpassing $2,660/ounce as investors sought refuge amidst escalating Russia-Ukraine tensions and the US’s veto of a Gaza ceasefire resolution.”

Brent crude futures surged by 2% to $74.30/barrel, driven by reports of Ukraine’s use of Western-supplied long-range weapons and Russia’s intercontinental missile response.

The Rand edged higher to R18.00/$, supported by the dovish stance of the South African Reserve Bank (Sarb) and stronger gold prices, although gains were limited by the robust dollar and global geopolitical uncertainties.

Tracey-lee Solomon, economist at the Bureau for Economic Research, points out that the Rand strengthened after the welcome news late last Friday that the credit rating agency S&P Global had upgraded the country’s rating outlook from stable to positive.

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, point out that the Rand briefly pulled back to touch R17.98/$ after the Sarb presented a cautious policy statement on Thursday but dipped back to R18.12 in late trading on Thursday. On Friday afternoon it was hovering around R18.09/$.

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Inflation decreased by a full 1% in October

Pabalelo Mosoma, economist at the BER, says consumer inflation moderated faster than expected from 3.8% in September to 2.8% in October, primarily driven by a sharp decline in transport inflation.

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say they see inflation at 3.2% in November and project a steady lift in inflation going into 2025, but not surpassing 4.0%. “This trend is supported by positive base effects and contained underlying inflation.”

Matshego and Nkonki expect headline inflation to start edging up next month and throughout next year as the base normalises. “Fuel prices will increase due to slightly higher global oil prices and a weaker Rand, while food prices will also start to rise as the impact of drier weather conditions earlier in the year continues to filter through to certain food items.”

They forecast inflation to end the year just below 4% and average 4.5% in 2024. “The upside risks to our forecast increased somewhat over the past month. Despite these risks, the inflation outlook remains relatively subdued, with CPI expected to hover around the Sarb’s 4.5% target.”

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Reserve Bank only cuts repo rate by 25 basis points despite lower inflation

The Monetary Policy Committee (MPC) of the Sarb only cut the repo rate by 25 basis points, despite calls from economists to cut it by 50 basis points. Mosoma points out that the Sarb continues to view inflation risks as broadly balanced.

“On the growth front, the Sarb maintained its 2024 gross domestic product (GDP) growth projection at 1.1% but revised its 2025 forecast upward to 1.8%. The improved outlook for 2025 is underpinned by factors such as lower inflation, rising real incomes and additional consumer spending driven by two-pot retirement system withdrawals.”

Matshego and Nkonki say the Sarb’s decision comes as no surprise, given the ongoing moderation in inflation. “Despite the current favourable trend in domestic inflation, the risks to the outlook have increased slightly since the September meeting.

“The Rand will likely face bouts of pressure amid the anticipated changes in US economic policies. In addition, the ongoing geopolitical conflicts still pose upside risks to oil prices, but these will likely be countered by muted global demand.

“Further upside pressure could emanate from elevated electricity and administered prices. While inflation will likely drift higher, it will remain anchored around 4.5% over the next three years. Against this backdrop, we expect the Sarb to continue its easing cycle, cutting by a cumulative 75 basis points in 2025.”

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say the MPC expressed the need for continued reform, ranging from administered prices and network industries to ensuring sufficient macroeconomic buffers.

“These reforms are not only key to lowering operational costs and structural inflation, but also reducing South Africa’s vulnerability to external shocks. There is no doubt that South Africa has sufficient monetary policy space and given the prevailing restrictive stance, the reform-related task for monetary policy going into the outlook will rather include lowering the inflation target.”

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Business confidence increases by 7 index points

The RMB/BER Business Confidence Index (BCI) for the fourth quarter increased by 7 index points to 45, with a broad-based improvement across different business sectors. Mosoma says this means that 45% of the respondents were satisfied with prevailing business conditions.

“Underpinning the improved sentiment was an increase in activity and better business conditions. Encouragingly, business conditions are expected to improve further in the next quarter and this bodes well for business sentiment.”

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano point out this positive trend, marking the third consecutive increase, placing the index nearly 20 points above its recent low of 27 reached in the second quarter of 2023.

“The uptick in sentiment is driven by improved business activity and operating conditions compared to the third quarter of 2024. Moreover, businesses are optimistic about the upcoming quarter. All sub-sectors, except new vehicle dealers, reported increased confidence and three – wholesale, retail and building contractors – even surpassed the 50-neutral level. Notably, all sectors, except new vehicle dealers, now have confidence readings at or above their long-term averages.”

ALSO READ: Weekly economic wrap: Rand dives, mining and employment up

Mixed performance in internal trade data for third quarter

Statistics SA released a slew of internal trade data this week, revealing mixed results across trade sectors. In the retail sector, real sales grew by 0.9% in September. However, wholesale trade continued its downward trend, with real sales contracting by 6.5% in September.

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say retail sales growth undershot expectations and decelerated in September, down from a revised 3.3% in August. “Nevertheless, average growth over the quarter means that the retail industry will be a boost to GDP growth in the third quarter of 2024.

“Importantly, although this month’s print coincides with the introduction of the two-pot retirement system, it does not yet give a complete picture of consumer behaviour, given the administrative lags in settling withdrawals.”

Matshego and Nkonki point out that retail sales are steadily trending upward, suggesting it has turned the corner thanks to lower inflation. “We should see this trend gathering momentum as inflation stabilises around the midpoint of the Sarb’s target.”