Weekly economic wrap: PPI down, PMI not too bad

In a week where all eyes were on the minister of finance who delivered his Mid-Term Budget Policy Statement, the rand did not move much, while the PPI came down in September and the PMI for October recorded a second positive reading.

Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), says the reaction of domestic financial markets on Thursday morning, with the rand exchange rate dipping weaker, can perhaps be best described as being underwhelming.

“The rand managed to close a touch stronger on Thursday compared to a weaker dollar and gained more against an even weaker UK pound.”

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say the rand recovered some losses this week, mainly from a weaker US dollar. “However, gains were capped after the Medium-Term Budget Policy Statement (MTBPS) on Wednesday failed to impress markets and showed a slightly worse trajectory of the key fiscal ratios over the next three years relative to what was projected in the 2024 Budget Statement in February.”

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Gold price highest ever, oil price lower

IJssel de Schepper also points out that the gold price hit another record high earlier in the week, reaching $2 782/oz on Wednesday.

Meanwhile, the oil price declined by more than 2% this week, with the biggest drop occurring on Monday after Israel’s attack on Iran avoided energy facilities and Iran refrained from issuing a direct threat of retaliation.

Matshego and Nkonki say Brent crude oil prices declined by 3.6% compared to the previous week due to supply concerns after the Energy Information Administration reported an unexpected decline of 0.5 billion barrels in US inventories.

“The ongoing tensions in the Middle East remain an upside risk, with reports of Iran planning to launch an attack on Israel in the coming days pushing prices over $74/barrel on Friday morning. “

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PPI lowest since June 2020

Statistics SA announced on Thursday that headline producer price inflation (PPI) moderated significantly in September to 1%, down from 2.8% in August. Nkosiphindile Shange, economist at the BER, says this PPI reading beats expectations for 1.3%, while it was the second consecutive month of a significant drop in producer inflation.

“The slowdown in prices was primarily due to price declines of 2.1% in the chemicals sector, while there were softer price increases in machinery and equipment of 3.4% in September compared to 3.5% in August.

“On the contrary, food inflation was up by 3.8% in September, compared to 3.6% in August. This was primarily due to a 12.9% increase in the price of fruit and vegetables due to shortages in items like potatoes, where there is an estimated 32% yield lost in 3 674 hectares in Limpopo. However, Potato SA said that the news about shortages is exaggerated and prices should moderate soon.”

Matshego and Nkonki say they expect PPI to remain subdued in the coming months, contained by continued global disinflation, low global oil prices, a relatively steady rand and more favourable weather conditions. “We forecast PPI to average 3.3% in 2024, down from 6.9% in 2023.”

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PMI dipped but still positive

According to the BER, the Absa Purchasing Managers’ Index (PMI) edged down to 52.6 points in October 2024 after an upbeat third quarter closing at a revised 53.3 points in September. However, the BER says it is encouraging to see the second consecutive print above 50 as this has not happened since a positive streak in late 2022 and early 2023.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says although the PMI dipped in October, it still recorded a successive positive reading, implying that the sector expanded relative to September.

“The latest PMI scores encouragingly point to early signs of a sustained increase in the manufacturing sector. This follows a period of acute volatility, driven by a combination of uncertainty and several supply and demand-side factors in recent months.

“However, easing supply-side constraints, lower fuel prices and interest rate cuts suggest that demand conditions will improve further in 2024, which should translate into stronger economic activity.”

He says overall economic growth was sluggish in the first half of the year, but the outlook has improved since the elections in May. “Our base case is still for South Africa’s real gross domestic product (GDP) to expand by 1.0% in 2024, reaching 1.7% next year due to improved post-election growth prospects.”

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Private Sector Credit Extension growth remained resilient

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say Private Sector Credit Extension (PSCE) growth remained resilient, even as it slowed to 4.6% in September, from 4.9% in August.

“The outcome exceeded market expectations for a 4.2% increase and reflected a slowdown in corporate lending while there were signs of stabilisation in household credit. Overall, when adjusted for inflation, PSCE experienced modest growth of 0.8% in September, marking the second consecutive month of expansion. This suggests an improving operating environment for consumers and businesses.”

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Trade balance records another surplus in September

The trade balance recorded another surplus in September, reaching R12.8 billion, a notable improvement from the revised August surplus of R5.1 billion (initially R5.6 billion).

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say this reflected a 3.5% monthly increase in exports to R170.7 billion, while imports declined by 1.3% to R157.9 billion. The year-to-date trade surplus has measured R100.4 billion, 66% above the R60.4 trade surplus recorded over the same period last year.

“The third quarter trade balance data is expected to offer support to the current account balance, albeit to a lesser extent than in the second quarter.”

Matshego and Nkonki say they were surprised by the trade surplus widening to a notable R12.8 billion from R5.1 billion in August after two months of narrowing, with imports deviating from their positive growth trend in September.

“Power supply has stabilised and the rand has been resilient, while consumer and business confidence improved and inflation continues to ease. These factors are expected to bolster demand and drive imports higher.

“However, exports are expected to remain contained by moderate global demand, particularly from key trade partners, such as China and the Eurozone, amid soft economic growth. Further downsides will likely emanate from the muted prices of South Africa’s key commodities and the slow recovery from rail and port inefficiencies.”