Weekly economic wrap: PMI is the bright spot while rand slips

The week’s economic data was mixed, with the Absa Purchasing Managers’ Index (PMI) a bright spot pointing to a rebound in manufacturing activity, while the rand slipped after trading close to the R17/dollar level early in the week and new vehicle sales underperformed.

Bianca Botes, director at Citadel Global, says the rand fell to R17.50/dollar, down from a recent high, as the dollar strengthened amid rising geopolitical risks. However, she says, the rand is still supported by optimism about South Africa’s economic recovery following the formation of the GNU and a more favourable domestic outlook.

“The South African Reserve Bank’s cautious start to its rate-cutting cycle also supports the currency’s longer-term prospects.”

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say the rand fell by 2% on Thursday from the previous week, with the drag mostly coming from the stronger dollar after US Federal Reserve (Fed) Chair Jerome Powell’s hawkish comments dented hopes for more aggressive interest rate cuts this year. “Further downside stemmed from risk-off trade following escalated tensions in the Middle East.”

ALSO READ: Weekly economic wrap: the rand definitely stole the show

Brent crude oil and gold prices

Botes points out that gold remained near $2,655/ounce, benefitting from its status as a safe-haven asset amid the Middle East conflict. “However, gains were tempered by strong US labour data, which reduced expectations of a lenient monetary policy from the Fed.”

Brent crude oil prices also continued to increase toward $75/barrel, buoyed by escalating tensions in the Middle East. Fears of supply disruptions due to conflict between Israel and Iran have driven prices up, Botes says.

Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER) says the Brent crude price initially rose following the strike on Israel as markets priced in a renewed risk premium but it fell back towards the middle of the week.

“Then, on Thursday, the oil price surged by about 5% to the highest level in a month after US President Joe Biden said there were discussions around Israel targeting Iran’s oil facilities. Iran is a significant player in the global oil market and exports about 1.6-1.8 million barrels per day.

“It is uncertain if the oil price will stay this high or once again drop back, as OPEC+ does have significant spare capacity and could easily ramp up production in the case of supply not meeting demand.”

Matshego and Nkonki say Brent crude oil prices soared by 7.8% compared to the previous week. “On Thursday, oil futures traded at over $78 per barrel, extending this week’s gains after US President Biden’s comments on Israel’s likelihood of attacking Iranian oil facilities.

ALSO READ: PMI down again in August, showing high volatility in market

Absa PMI in expansionary territory

After a decline into contractionary terrain in August, the Absa PMI returned to expansionary territory, rising by a solid 9.2 points to 52.8 in September.

Tshidiso Mofokeng, economist at the BER, says business activity measured by the PMI improved on the back of a strong rebound in new sales orders, reflecting a positive recovery in both domestic and external (export) demand.

“Notably, input costs for producers in the PMI fell to its lowest level since March 2018, which was attributed to a strong(er) currency coupled with lower oil prices.

ALSO READ: New vehicle sales remain in the red as offset in September drops

New vehicle sales

Annual new vehicle sales fell by 4.1% in September compared to a 0.4% decline in the previous month, according to the National Association of Automobile Manufacturers of South Africa. Mofokeng points out that this was the twelfth consecutive annual decline.

“However, despite monthly declines in August and September, a big increase in July means that vehicle sales were up in the third quarter compared to the second quarter. This bodes well for gross domestic product (GDP).”

Matshego and Nkonki point out that the pace of decline in local sales fell significantly. “The outlook for vehicle sales has improved. Lower inflation, the firmer rand exchange rate and falling interest rates will support consumer buying power and boost passenger vehicle volumes.”

ALSO READ: Current account deficit narrows broadly as expected in second quarter

Trade surplus

The trade surplus narrowed by more than expected in August to R5.6bn from a downwardly revised R17.1bn in July. Exports declined sharply by 5% due to lower outbound shipments in most product categories but imports increased by 1.8% due to higher demand for machinery and electronics as well as chemical products, Mofokeng says.

Matshego and Nkonki this was the smallest surplus recorded since April 2023, driven by a contraction in exports while imports edged higher during the month, likely reflecting muted global demand and lower prices of some of South Africa’s key commodities.

“Mineral product shipments, which are predominately made up of crude products, have contracted every month since March, reflecting the moderation in global oil prices. However, some renewed upside pressure could materialise due to the constant escalation in tensions in the Middle East.

“We expect the trade surplus to narrow further in the coming months as imports expand faster than exports. Exports will still be contained by relatively muted global demand, with the slow recovery in rail and port inefficiencies also capping the upside.”

However, they say, consistent power supply should continue to support production and thus export volumes. We expect imports to be supported by stronger consumption as the ongoing easing in inflation bolsters real incomes and as interest rate cuts reduce the strain on household finances.

ALSO READ: Repo rate cut by only 25 basis points, but this is how much you will save

Private sector credit extension

Private sector credit extension accelerated from 3.5% in July to 5% in August, according to the Reserve Bank. On the other hand, annual money supply (M3) increased by 6.1% in August from 5.9% in July.

Mofokeng says further easing in the interest rate environment may boost the appetite for credit in the coming months.

Matshego and Nkonki believe that credit demand will likely improve further in the coming months. “Lower inflation will boost real disposable income, debt service costs will ease as interest rates fall and the two-pot retirement system will give households access to a portion of their retirement funds.

“These developments will gradually reduce the strain on household finances, boosting consumer confidence and spending. The outlook for corporate credit is more uncertain. Company loan growth will likely remain relatively volatile and subdued during the rest of this year as fixed investment is only expected to turn the corner in 2025 as the domestic economy gains more upward traction, global growth picks up some pace and the general operating environment improves further.”