Weekly economic wrap: subdued inflation with slightly weaker rand

After a week’s delay before the inflation rate for January was announced, the news was not too bad with inflation increasing marginally, while the rand traded a bit weaker.

The biggest economic news of the week was the closure of ArcelorMittal’s long steel business, announced on Friday, but it has not affected the rand yet.

Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), says in financial markets, the confirmation that Trump would implement tariffs on Mexico and Canada, as well as China, from next week boosted the US dollar. In step, the peso and looney lost ground.

“The rand also slipped on Thursday after remaining largely flat to the dollar through the week. Cryptocurrencies, which surged following Trump’s election, are running out of steam (patience) and Bitcoin tumbled below $90 000, the lowest since November.”

Bianca Botes, director at Citadel Global, says the rand remained range-bound but weakened slightly against the dollar this week, trading near R18.46/$ on Friday afternoon. “Domestic factors, such as inflation concerns and fiscal uncertainty, continue to cap gains for the rand.”

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, also noticed that the rand dropped this week after pulling back last week, trading closer to R18.50/$ from Monday’s close of R18.33.

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Weekly loss for gold while oil rebounds

Gold prices remained near record highs early in the week but slipped below $2,900/ounce on Thursday due to a stronger dollar and signs of softening physical demand from China and Switzerland, Botes says.

“The metal remains supported by geopolitical tensions and expectations of the US Federal Reserve’s rate cuts later this year.”

Brent crude oil rebounded above $73/barrel after hitting two-month lows earlier in the week, Botes says. “Supply concerns resurfaced following US sanctions on Venezuelan crude exports and President Donald Trump’s announcement that he would refill the US’s Strategic Petroleum Reserve rapidly.”

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Inflation increases marginally in January, no effect on rand

Statistics SA released the first inflation print for 2025 on Wednesday, with inflation increasing by 0.2% to 3.2% in January from 3.0% in December. The main contributors to January’s annual inflation rate were housing and utilities (4.5%), food and non-alcoholic beverages (2.3%) and restaurant and accommodation services (4.9%).

Katrien Smuts, economist at the BER, says although food and non-alcoholic beverages made a positive contribution to headline inflation, the rate of increase slowed compared to December, with food inflation specifically decelerated from 1.7% in December to 1.5% in January, driven by base effects and the ongoing supply recovery of various food products.

Matshego and Nkonki say the increase in inflation was slightly less than the market expected. “Encouragingly, core inflation, which excludes volatile food and energy costs, held steady at 3.5%, suggesting that underlying price pressures remain contained.”

They also point out that Statistics SA introduced the new basket and weights for the consumer price index, which assigns a larger weight to food and non-alcoholic beverages. “Given that food inflation declined, the new weights likely resulted in a softer outcome than would have been the case.”

“We expect the gentle rise in inflation to continue. Goods inflation will start edging up off a low base, driven by food and fuel prices. The upside will be kept in check by subdued services inflation, which is expected to moderate further in the first half before reversing course towards year-end. We still expect headline inflation to average 4% in 2025, down from 4.4% in 2024.”

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, expect that inflation should remain subdued in the first half of the year before rising steadily into the second half of the year.

“We see headline inflation posting 3.4% in February and settling above 5% by the end of the year, mainly due to fading positive base effects and improving demand. Nevertheless, we currently anticipate that average inflation will be softer than in 2024.

“Risks to the outlook include a more robust normalisation in services inflation as well as a faster acceleration in administered price inflation, especially for water services. In addition, any hike in the VAT rate would raise annual inflation.”

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PPI also edged higher in January

According to Statistics SA, producer price inflation (PPI) also edged higher in January, increasing to 1.1% from 0.7% in December. Food products, beverages and tobacco products contributed positively to the overall PPI figure, increasing by 4.4%.

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say monthly PPI was the highest since April 2024, driven by increases in fuel prices and the costs of metals, machinery, equipment and computing equipment.

Matshego and Nkonki expect that producer inflation will likely increase gradually in 2025, driven mainly by the normalisation of the base on food and fuel indices. “We forecast PPI to average around 3.5% in 2025.”

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Slight decline in Reserve Bank’s leading business cycle indicator

The leading business cycle indicator of the South African Reserve Bank (Sarb) recorded a slight decline in December, falling by 1.8% to 112.8, down from 114.8 in November. Five of the seven components contributed negatively to the indicator in December, while one remained unchanged.

Matshego and Nkonki say the only positive contribution came from an acceleration in the six-month smoothed growth rate of job advertisement space. “Despite the monthly decline, the indicator still registered a 1.6% increase compared to a year ago, suggesting a slightly improved outlook compared to a year ago.”

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano point out that the indicator nevertheless still increased by 1.6%, marking the ninth consecutive month of annual growth. “This aligns with our view of an economic upturn, with growth expected to recover from below 1% over the past two years to nearly 2% in 2025/26.”

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Also, slight decrease in private sector credit extension

Private sector credit extension decreased slightly in January, moderating to 4.1% from 4.2% in December. Household credit dipped to 2.9% from 3.0% and corporate credit to 5.3% from 5.4%.

Within household credit, unsecured lending continued to struggle, with loans and advances falling by 1.6%. Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say this offset the steady growth in credit card usage, which remained strong at 8.8%.