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Writer's pictureDr Roelof Botha

On Balance - Economic Update September

The downside

Sometimes, the anticipation of an event exceeds the actual occurrence, as was proven by reducing the Reserve Bank’s repo rate by 25 basis points, translating into a new prime overdraft rate of 11.5%.


This rate cut was insignificant from the perspective of the 200 basis point decline in the benchmark long-term interest rate (the 10-year government bond yield) and the most recent drop in the consumer price index (CPI) from 4.6% to 4.4%. Nothing has changed regarding the actual prime rate (prime minus CPI)—it remains at 7.1%, 129% higher than the average real prime rate during the previous Governor of the Reserve Bank, Gill Marcus.


Although the mood amongst consumers and businesses has undoubtedly improved since the formation of a national unity government, a challenging task is to lift critical sectors of the economy to higher levels than before the COVID-19 pandemic. Construction activity remains lower than six years ago (as confirmed by the most recent Afrimat Construction Index), whilst the Drive.co.za Motor Index (DMI) remained on par with pre-Covid levels and was lower in September than a year ago.


To kick-start meaningful economic growth, the Monetary Policy Committee of the Reserve Bank needs to reread its mission statement carefully. It clearly states that growth and employment creation should not be sacrificed at the undue cost of combating inflation. Interest rates should be lowered to at least the level just before COVID-19 (10% prime) post haste.


The upside

Retail trade sales start recovering.

Due to the sharp increase in debt servicing costs of South African households, consumers have been forced to tighten their belts, as demonstrated by the declining trend in actual retail trade sales that kicked in during the fourth quarter of 2022.


Fortunately, an increase in employment during 2023 and marginally higher remuneration levels combined to reverse this trend during the second quarter of 2024. The widely anticipated cut in lending rates may also have contributed to the actual year-on-year increase of 2.4% in retail sales during the three months between May and July.

On Balance - Economic Update September

Shops that sell furniture and appliances fared the best, posting a rise of 4.7%, followed by general dealers (the largest group) at 4.4%.


Rand strength continues

Over the past twelve months, South Africa’s currency has outperformed most other currencies, strengthening by 11% against the US dollar. In the process, the rand has fared better than the Australian dollar, the Euro, the Japanese yen, and the British pound. Since the end of September last year, only the Malaysian ringgit and the Polish zloty have strengthened significantly against the greenback.

On Balance - Economic Update September

Currencies cannot be weak or strong on their own, so the main reason for the outstanding performance of the rand is intimately tied to a weaker dollar. The dollar has been under pressure ever since it became clear that the Federal Reserve in the US was on the verge of starting a rate-cutting cycle. The latter occurred during September, a move that has prompted fund managers around the globe to start looking for more attractive havens than US Treasury notes.


It seems clear that the rand has also benefited from renewed business confidence in the wake of the new national unity government, which seems intent on roping in private sector expertise to address problems associated with logistics and energy infrastructure. The strong rand constitutes one of the critical reasons for the downward trend in fuel prices – a welcome development that is bound to keep inflation in check and facilitate further declines in the prime overdraft rate.


Rate-cutting cycle starts

In September, the Monetary Policy Committee (MPC) of the Reserve Bank finally decided to lower the official bank rate (the so-called repo rate), which was automatically followed by an equal reduction of the prime overdraft rate of the commercial banks. Underpinning the decision to lower the repo rate was a further easing of inflationary pressures, with the August consumer price index (CPI) recording a drop from 4.6% to 4.4% - below the mid-point of the MPC’s inflation target range of 3% to 6%. The latest reading of the producer price index (PPI) is excellent news, as it is a leading indicator for consumer price trends. The PPI has dropped to 2.8% - its lowest level since October 2020, virtually guaranteeing a rate cut of 50 basis points in November.

 
Dr Roelof Botha

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.

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