By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole Koketso Mano
The March 2024 Monetary Policy Committee (MPC) meeting is scheduled to take place on Wednesday, 27 March. While we expect interest rates to remain unchanged, the messaging at that meeting remains key as many spectators of monetary policy around the globe seek indications of when interest rate cuts may be implemented. The middle of the year appears to be the expected turning point following the most robust hiking campaign that brought interest rates to the highest levels since the Global Financial Crisis period. However, with inflation still above target in much of the globe and trade fragmentation still the order of the day, the difficult part of the disinflation process is yet to be complete, and risks remain tilted upwards.
Recent commentary from the European Central Bank (ECB) provided optimism that interest rates could start softening as early as June, however, a cautious note on data dependency remained key. Markets are pricing in a US Fed rate cut at around that time, more likely in July, but healthy economic outcomes and easier financial conditions could outweigh the need for a speedy start to a cutting cycle. The latest Fed dot plot shows that committee members anticipate a sum of 75bps of cuts this year, with a high probability that less cuts will be delivered. Furthermore, surveys seeking the expectations of economic academia show that the probability of a late and shallower cutting cycle this year is material. Worsening the high for longer case is the recent shift in Japan's policy rate into positive territory for the first time since 2016. This broadly highlights that neutral interest rates will not be as supportive as they have been over the past decade and South Africa (SA) will have to offer attractive rates to remain competitive
Also important will be continuous progress in the structural reform agenda, which holds the potential to mitigate risks associated with SA assets and alleviate interest rates, thereby enhancing SA's attractiveness as a destination for capital.
Another headache for monetary policy is SA inflation and expectations. The February inflation print highlighted the traditional pre-pandemic lift in inflation in the first quarter of the year as several infrequent survey outcomes become available. While the MPC would have priced this in, there are a few risks that are unfolding and could adversely affect the disinflation trend over the course of the year. These include higher food inflation as crop yields are affected by hostile weather conditions, higher selling prices as reflected in the 1Q24 business confidence survey results, as well as the possibility that the rand does not recover as anticipated should interest rates in advanced economies remain sticky and election outcomes be unfavourable.
Over the longer-term, trade fragmentations and local infrastructure issues will continue to pose upside risk to imported inflation and input costs. Furthermore, surveyed inflation expectations remain above target, north of 5%, and will continue to be a concern for monetary policy. However, the differential between inflation and salary expectations highlights that real wage growth should be muted and the risk of second-round effects will be limited.
The MPC's upcoming statement should be a hawkish one, fanning any excitement about the cutting cycle. While this will be in step with the caution displayed by major market central banks, it will be deemed necessary in a period of still-heightened inflationary risk. We still price in the start of the cutting cycle in July, but as a holding statement: turning points are difficult to predict!
Week in review
Consumer inflation lifted to 5.6% in February from 5.3% in January, with monthly pressure of 1.0%. Driving the monthly pressure was core inflation, which added nearly 0.9ppt, while fuel added over 0.1ppt. Core inflation lifted by 1.2% m/m and 5.0% y/y, the monthly lift was primarily driven by medical insurance inflation which increased by 10.3% m/m. Fuel increased by 3.0% m/m and 5.4% y/y. Fortunately, food and NAB inflation continued to ease, settling at 6.1% y/y versus 7.2% previously. We expect further monthly pressure on headline inflation in March, as periodical survey outcomes such as education and housing, push core inflation up and fuel price inflation lifts. Nevertheless, annual headline inflation could slow to 5.5% y/y on positive base effects. As the year advances, the disinflation trend should continue but is threatened by hostile weather that has affected crop estimates.
Retail sales volumes experienced a significant decline of 2.1% y/y in January, following a robust 3.2% y/y increase in December 2023 and a yearly decline of 1.0% in 2023. Seasonally adjusted sales volumes dropped by 3.2% m/m, marking the most substantial monthly decline since July 2021, when volumes plummeted by 10.3% and highlighted the severe impact of the social unrest. The weak performance in January was broad-based, with five out of seven retail segments recording annual contractions. Sales of pharmaceutical and medical goods, cosmetics, and toiletries contracted by 4.4% y/y, marking the eighteenth successive month of contraction. Hardware, paint, and glass sales declined by 4.3% y/y, with an average decline of 5.3% over the past eighteen months. Sales of textiles, clothing, footwear, and leather goods decreased by 6.6%; Food, beverages, and tobacco in specialised stores declined by 1.1%; and all "other" retail sales declined by 2.9%. The decline in total retail sales was partially offset by the household furniture, appliances, and equipment segment, which expanded by 3.6% y/y, and general dealers, which were sluggish at 0.2% y/y. Overall, the prolonged and widespread weakness in retail sales underscores the ongoing cost-of-living crisis consumers face.
Week ahead
On Monday, the FNB/BER Consumer Confidence Index (CCI) for 1Q24 will be published. The CCI edged slightly lower to -17 index points in 4Q23, from -16 in 3Q23. Although consumer sentiment has improved compared to the very low levels recorded during 1H23, the latest reading was the lowest festive season reading in more than 20 years. The slight deterioration in the CCI was driven by a relapse in the economic outlook sub-index, from -22 in 3Q23 to -28 in 4Q23. In contrast, the household financial outlook sub-index improved further, from -1 to +3, indicating that households are more concerned about the country's prospects rather than at the individual level. Nevertheless, most consumers continue to perceive that, at present, it is not appropriate to purchase big-ticket durable goods.
On Tuesday, the leading business cycle indicator for January will be published. The leading indicator declined by 0.8% m/m in December 2023, following a 0.4% decline in November. Four of the nine constituent variables contributed to the decline in the leading indicator, outweighing increases in the remaining five. The most significant decline was recorded in the number of residential building plans approved.
Also, on Tuesday, the FNB/BER Civil Confidence Index for 1Q24 will be published. The Civil Confidence Index shed two index points to register 41 in 4Q23. Interestingly, however, there seems to be a disparity between sentiment and the underlying market conditions: sub-indices tracking activity, profitability, and tender competition paint a more positive picture than what the overall sentiment suggests. This implies that confidence is being negatively affected by factors not directly related to current demand conditions. Instead, it is reflective of broader pessimism from other parts of the economy relating to load-shedding, logistical constraints, and the weakening fiscus. We also note that respondents remain concerned about the prevalence of criminal activity in the sector as well as the uncertainty created by the cancellation of tenders and delays in tender adjudication. Overall, the survey results suggest that demand for civil construction remained well supported in 4Q23 and the forward-looking indicators imply that this should continue to be the case over the near-term.
Lastly, on Tuesday, the Quar terly Employment Statistics for 4Q23 will be released. The formal non-agricultural sectors of the economy added nearly 31 000 jobs or 0.3% q/q in 3Q23, largely reflecting job creation in community services, trade, transport, and mining. Meanwhile, jobs were lost in business services, manufacturing, and construction. Compared to a year ago, over 250 000 jobs have been created, a 2.6% increase. Nevertheless, over 52 000 jobs have been lost relative to the pre-pandemic 3Q19 level. Also, more part-time rather than full-time jobs have been created and in general, average salaries have recovered faster than jobs
On Thursday, data on Private Sector Credit Extension (PSCE) for February will be released. PSCE rose by 3.2% y/y in January, the slowest increase since February 2022. Corporate credit grew moderately by 2.4% y/y, down from 5.5% y/y previously, while household credit expanded by 4.1% y/y, slightly lower than the 4.3% y/y growth in December. Within corporate credit, general loans and advances increased by 0.8% y/y, compared to 4.2% y/y previously. Mortgage advances grew by 3.7% y/y, slower than December's 3.9% y/y expansion. Vehicle asset finance continued strong growth, rising by 16.7% y/y. For household credit, mortgage advances stabilised at 3.3% y/y, while vehicle asset finance increased by 7.3% y/y, reflecting growth in SUV purchases. General loans and advances expanded by 1.2% y/y, down from 4.2% y/y, consistent with a slowdown in solar-related installations. Overall, the moderation in PSCE growth underscores the impact of past interest rate increases on credit uptake. Adjusted for inflation, annual PSCE growth has been negative since August 2023, indicating tighter credit conditions and supporting the expectation of interest rate reductions in 2H24
Also on Thursday, data on producer inflation for February will be released. In January, producer inflation surged to 4.7% y/y from 4.0% in December 2023, marking a monthly uptick of 0.1% after two consecutive months of deflation. Excluding petroleum-related products, producer inflation moderated to 5.1% y/y from 5.6% but faced monthly pressure of 0.7%. Annual food product inflation decelerated to 3.6% from 4.7%, primarily due to a decline in meat inflation to 1.3% from 2.9%, while fruits and vegetables inflation climbed to 11.8% from 10.7% y/y. Producer inflation likely escalated further to 5.0% y/y in February, with monthly pressure hovering around 1.0%, primarily influenced by the rise in petroleum-related product prices.
Lastly, on Thursday, the trade balance for February will be published. In January, the trade balance notably turned into a deficit of R9.4 billion, starkly contrasting the upwardly revised surplus of R15.6 billion recorded in December 2023. This shift was propelled by a 12.8% monthly decline in exports to R144.3 billion and a 2.6% increase in imports to R153.7 billion. However, the R9.4 billion deficit represents an improvement from the R24.4 billion deficit registered in January 2023.
