Weekly economic wrap: the Rand definitely stole the show

In a week with no major data releases, the Rand definitely stole the show from lacklustre official figures. The Rand exchange rate has been on a bender due to favourable external developments, and the question now is whether there is a hangover on the way and, if so, how severe it will be.

Jacques Nel, head for Africa Macro at Oxford Economics Africa, says the Rand is surging thanks to positive sentiment stemming from domestic political developments and signs of a more cordial relationship between government and business.

“It is clear that the South African Reserve Bank (Sarb) will implement a more hawkish policy loosening cycle than the US Fed, while the Chinese government has suggested that the monetary stimulus bazooka will be accompanied by a fiscal one. The Rand has appreciated by about 4.6% against the US dollar over the past two weeks and looks set to breach the R17/US$ threshold.”

Nel says their estimates suggest that the Rand has been undervalued for some time. “However, we believe the recent surge can largely be attributed to sentiment rather than a market correction to reflect longer-term fundamentals.

“It is therefore impossible to say where the exchange rate will stabilise and importantly, how long it will stay at that level. Regardless, the implications for inflation and fuel prices are welcome and could contribute to the jumpstart the economy needs.”

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Strongest level for the Rand since January 2023

Bianca Botes, director at Citadel Global, says the Rand hit its strongest level since January 2023, riding the wave of a weaker dollar and the surprise stimulus package from China, which bolstered emerging markets. “With local inflation expected to remain comfortably below target and growth projections looking up, the rand could be in for sustained strength.”

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, were impressed with the Rand rallying on Thursday, closing at R17.2/$ against the dollar, its highest level since January 2023.

“The local unit continued to benefit from favourable global risk sentiment as expectations of further US interest rate cuts boosted high-yielding currencies. Additionally, local sentiment has been lifted by expectations that the government of national unity will implement measures that will help to revive economic growth.”

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Employment boosted by temporary employment around election

According to Statistics SA’s Quarterly Employment Statistics for the second quarter, non-agricultural formal sector employment increased by 0.4% compared to the previous quarter, but according to Nel, this increase can be explained by a 92 000 bump in temporary community service jobs related to the elections.

Mosoma points out that formal non-agriculture employment increased by 42 000 jobs, also fully driven by employment from extra-budgetary institutions in the public sector for the election. “Without this boost, employment would have been down by 48 000 jobs compared to the previous quarter amid a broad-based decline across industries, such as business services, construction, manufacturing, mining, transport and trade.

“Disappointingly, total formal employment declined by 1.3%, indicating continued weakness in the domestic labour market.”

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, also noted that the increase in formal non-agricultural sector employment was due to people employed temporarily for the election.

“Compared to the second quarter of 2023, 144 000 jobs were lost, but over half a million jobs have been added since the second quarter of 2019. With easing policy uncertainty and growing confidence in the economy’s trajectory, growth and employment creation should improve. Furthermore, slower inflation should support profitability.”

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Producer Price Inflation drops more than expected, thanks to factors such as steady Rand

Producer price inflation dropped more than expected to 2.8% in August from 4.2% in July, well below the consensus expectation of 3.5%.

Mosoma says the decrease marked the slowest increase in producer prices since July 2023, with the slowdown primarily driven by softer price increases in categories such as coke, petroleum, chemicals, and rubber and plastic products, as well as metals, machinery and computer equipment.

However, Mosoma points out that food inflation, excluding beverages and tobacco products, edged up slightly to 3.4% in August from 3.3% in July, indicating that the impact of earlier weather-related shocks is beginning to materialise.

“Overall, the moderation in producer price inflation suggests that consumer price increases are also likely to continue trending lower in the coming months.”

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say producer prices should remain subdued in the coming months, contained by continued global disinflation, a relatively steady Rand and more favourable weather conditions.

“However, there are some upside risks. Food inflation will likely edge higher on the lagged impact of the drought earlier this year and fading base effects. The outlook for fuel inflation is encouraging, with global oil prices expected to recede on the back of ample supply and muted demand.”

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say the outturn reflected a sharper slowdown than the Reuters consensus forecast of 3.5%. “We expect further moderation in producer inflation in September, potentially below 2.0%, primarily reflecting favourable petrol and diesel price dynamics.”

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FNB/BER Civil Confidence Index surges to a new eight-year high

The FNB/BER Civil Confidence Index surged to an eight-year high of 50 index points in the third quarter, rebounding from 44 points in the second quarter of 2024.

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano point out that this improvement was primarily driven by a significant recovery in profit margins, reaching their highest level since 2008.

“While activity growth moderated slightly in the third quarter compared to the previous year’s peak, the survey indicated increased tender activity and growing intentions to expand employment. However, respondents continued to express concerns about the negative impact of the construction mafia and government inefficiency on the sector.”