The downside
Labour market data published by Statistics SA at the end of June confirmed the origin of much of South Africa's socio-economic problems, namely high unemployment. Not only did formal sector jobs decline in the first quarter of 2024, but the average remuneration in the formal non-agricultural sectors did not keep pace with inflation. It is no surprise, therefore, that retail trade sales remain lethargic, and the number of new vehicles sold is declining.
A combination of high interest rates, inefficient public sector transport logistics, a drought (caused by the El Niño phenomenon) and uncertainty surrounding the outcome of the May national elections conspired to pressure economic activity. The worst recent trend for any key indicator is undoubtedly the sharp decline in the value of building plans passed and buildings completed in the Metros and larger municipalities.
These values declined by R2 billion and R2.5 billion, respectively, during the first four months of 2024 compared to the first four months of 2023. Construction is the most labour-intensive sector in the economy, and the newly appointed government of National Unity (GNU) has its work cut out to incentivise new building activity, especially in housing for lower-income earners.
The upside
Upbeat expectations for the manufacturing sector
In June, the Absa/BER purchasing managers' index (PMI) for business expectations in manufacturing in 6 months reached its highest level since February 2022. The June reading of 68.1 represents a significant improvement on the average index value of 53.2 during the preceding 24 months and promises to further boost the robust recovery of manufacturing sales since the middle of last year.
Further good news on the manufacturing front is the announcement by steel producer ArcelorMittal South Africa (AMSA) that it will continue to operate its longs business, the closure of which was deferred earlier this year (in steel industry terminology, longs business refers to the manufacturing of steel products such as wire, rod, rail, and bars as well as certain types of structural sections and girders, mainly for use in construction).
Any closure of AMSA's longs business would have negatively impacted the country's manufacturing and construction industries. Reasons to keep the plant fully operational include securing a working capital facility of R1 Billion for 12 months, improvements in Transnet's performance, and a provisional safeguard duty of 9% on certain hot-rolled steel products.
Producer price index remains in target range.
After some nervousness caused by an uptick in producer prices in April, the producer price index (PPI) declined again in May, with the latest reading of 4.6% virtually on the nose of the midpoint of the Reserve Bank's target range for inflation.
Price increases at the factory gate are also lower than the consumer price index, which remains marginally above 5% but comfortably within the target range of 3% to 6%. As a rule, producer prices are a leading indicator of consumer prices. The current trend bodes well for a further drop in the consumer price index (CPI), which could lead to an interest rate cut in July.
Global capital market approval of GNU
Several other critical economic indicators also reflect an improved outlook for higher growth, most likely because of the historic transition to a national unity government committed to preserving South Africa's democratic constitution and the principle of private property rights. These include the country's ten-year bond yield, which has shed 114 basis points since the last week of April, providing ample space to lower the Reserve Bank's repo rate.
Further proof of the new-found optimism in the economy is the recent performance of the rand. Between the first of March and the end of June, none of the sixteen key currencies monitored by Currencies Direct outperformed the rand against the greenback, with even the Euro, the Chinese yuan, and the Japanese yen taking a hit against the world's dominant currency.
This time, Rand's strength was not based on any relative weakness in the US dollar's value, as the dollar index (DXY) strengthened by almost 2% to 105.9 over the past four months, leaving most of the world's key currencies floundering. Although the rand is likely to remain volatile against the dollar, several leading financial institutions are predicting below R18 by the end of the year.
On Balance by Dr Roelof Botha deliberately emphasises positive news that, more often than not, emphasises the resilience of the South African economy and the immense scope for new business opportunities.
Comments