Stagflation persists three years after the pandemic
While global growth is still expected to slow this year, prospects have improved compared to expectations at the start of the year. The outlook has been bolstered by China's recovery from the pandemic lockdowns as well as better-than-anticipated growth outcomes in Europe and the US. In contrast, the domestic economic prognosis has worsened, and no growth is expected this year. This slow growth environment primarily underscores an economy languishing from electricity and logistical bottlenecks. Meanwhile, monetary policy has had to be tightened amid above-target inflation outcomes (and expectations), enhancing the cyclical domestic growth slowdown. Overall, external and domestic activity should be underwhelming relative to pre-pandemic averages. Here we briefly discuss our latest macroeconomic update.
Growth trimmed lower, despite better-than-expected 1Q23 growth outcome
The economy expanded by 0.4% q/q in 1Q23, better than our expectation of a mild technical recession and slightly better than consensus of a 0.3% expansion. While the growth rebound was broad-based across eight out of ten economic sectors, it was relatively muted compared to the 1.1% contraction in 4Q22. This implies that headwinds such as the electricity crisis and logistical challenges remain an impediment to faster economic growth.
Cyclically, the economy is dragged by the delayed and ongoing impact of higher inflation and tighter monetary policy. Against this background, we expect the economy to shrink marginally by 0.1% (2.0ppts lower than the average growth for 2022), reflecting weaker domestic demand, an assumed persistence of higher stages of load-shedding, as well as a drag from net trade due to a constrained rail network. Nevertheless, growth should gather pace towards the end of the year as inflation slows sufficiently. We expect GDP growth to average 1.1% in 2024, before rising to 1.8% in 2025 as energy constraints ease.
While domestic inflation peaked in July 2022, it remains sticky and materially above the SARB's preferred 4.5% anchor. We expect headline inflation to average around 6.2% this year before trending lower to 5.5% in 2024 and 5.0% in 2025. The near-term inflation outlook reflects rising underlying (core) inflation, the lingering inflationary impact of a weaker domestic currency on imported CPI components, and the expected increase in the marginal cost of supply from higher stages of load-shedding, much of which the consumer will ultimately have to absorb.
Against these cyclical headwinds, household consumption expenditure (over 65% of real domestic demand) could slow to below 1% in 2023 from 2.5% last year (and 5.8% in 2021). The largest drag on household consumption will likely be on discretionary items, while below-inflation labour income growth is expected to limit non-discretionary spending. Nevertheless, growth in credit uptake is still above inflation, though consumption credit has recently plateaued, and together with job creation over the past six quarters, should underpin some consumption expenditure growth. We expect ongoing investment in renewable energy, private sector embedded generation capacity, and a continued replacement cycle to support real fixed investment. However, depressed business confidence amid prevailing uncertainty and a lack of deep structural reforms implies that non-energy-related investment will be constrained.
The export environment is expected to be less favourable amid moderating global demand, while reduced domestic rail capacity and the higher cost of road freight transportation should drag export volumes. Still, import volumes should remain robust, supported by the replacement cycle, energy-related imports, and mineral products. This should increase the drag on growth from net trade.
The risks around our base case forecast are balanced. The most significant domestic risks remain higher-than-anticipated inflation and further monetary policy tightening, which would lead to even tighter credit conditions as the risk of defaults rises. On the upside, better-than-assumed load-shedding intensity could lead to better economic growth outcomes. If successful, policy interventions such as the Energy Action Plan and the establishment of the National Logistics Crisis Committee to drive the roadmap to advancing rail and port efficiencies should ultimately improve domestic operating business conditions, lift business confidence, and boost investment over the medium term.
Week in review
The leading business cycle indicator dropped 1.0% m/m in April, to 110.3 points, from 111.5 in the previous month. However, the monthly decline is less severe compared to the 2.2% slump in the previous month. This marks the third straight month of declines in the leading indicator as seven out of the ten available component time series decreased. The largest negative contributors were the narrowing of the interest rate spread and the deterioration in the RMB/BER Business Confidence Index. Meanwhile, the positive contributors were accelerations in six-month smoothed growth rate of job advertisements and real M1 money supply.
Headline inflation slowed to 6.3% y/y in May, down from 6.8% in April, and was 0.2% m/m. This was the lowest print in a year, mostly reflecting the higher base that was created last year, which will now support lower inflation. Core inflation was 0.1% m/m and 5.2% y/y, down from 5.3% last month. Fuel inflation was 0.4% m/m and 3.5% y/y, while food and NAB inflation remained elevated at 11.8% y/y and prices still reflected monthly pressure of 0.3%. We currently expect this deceleration in headline inflation to extend to 5.6% in June, falling within the target range. This will reflect the continuation of positive base effects, while monthly inflation should continue to be driven by input cost and exchange rate pressures. Without these factors, headline inflation could have slowed faster than currently envisaged. We predict average headline inflation of 6.2% this year, slower than the 6.9% recorded in 2022 but higher than the 4.7% average over the past five years.
Week ahead
On Tuesday, the Quarterly Employment Statistics (QES) for 1Q23 will be released. The QES data showed that total employment increased by 48 000 (0.5%) q/q in 4Q22, but is down by 94 000 (-0.9%) y/y and by 336 000 (-3.3%) when compared to the end of 2019. Quarterly job gains were recorded in trade (49 000), business services (9 000) and mining (2 000). Jobs were shed in construction (-10 000), manufacturing (-1 000) and electricity (-1 000), while transport and community services showed no quarterly changes in employment. Just over half of the jobs created in trade were full-time, while most of those in business services were part-time. Overall, part-time jobs (87.5% of jobs created) dominated the net quarterly gains, in line with seasonal demand during the festive period. Gross earnings increased by 8.5% q/q, 4.7% y/y and are 9.6% higher than they were at the end of 2019. More robust employment creation will be supported by an improvement in business sentiment and economic activity. Further progress in implementing structural reforms, including the alleviation of electricity and logistical constraints, is key. For now, the recovery in employment remains slower than that in earnings, and both will likely be constrained by weaker economic activity this year, as well as the lift in the cost of doing business.
On Thursday, the FNB/BER consumer confidence index (CCI) for 2Q23 will be published. Having recovered from -20 to -8 index points in 4Q22, the CCI plunged to -23 index points in 1Q23. The latest reading was broadly in line with the extraordinarily weak consumer confidence level recorded in 3Q20 (during a time of level three Covid-19 restrictions, alcohol bans, school closures and curfews), as well as in 2Q22 (when deadly floods devastated KZN and the economic ramifications of the war in Ukraine started to manifest). The reading of -23 is the third lowest CCI reading on record since 1994 and indicative of extreme concern among consumers about South Africa's economic prospects and their household finances. Overall, the about-turn in consumer confidence points to a marked decline in consumers' willingness to spend and foreshadows a significant slowdown in real consumer spending growth.
Also on Thursday, producer inflation for May will be released. Producer inflation slowed to 8.6% y/y in April from 10.6% y/y in March and remained steady (0.0%) on a month-on-month basis. This was the first time in sixteen months that producer inflation printed single-digit growth, having moved into double digits in December 2021. Year-to-date (January - April) producer inflation has averaged 11.0% y/y, marginally lower than the 11.4% y/y average over the same period last year, largely supported by petroleum-related product prices, which are up by 13.4% YTD compared to 24.9% in the corresponding period last year. The continued moderation in production inflation corroborates our view of continued moderation in consumer prices on the retail floor.
On Friday, the FNB/BER civil confidence index for 2Q23 will be published. The index increased for the fourth consecutive quarter to 42 index points in 1Q23, the highest level in over six years. Underpinning the lift in confidence was improved activity, profitability, and prospects for new work, related to investments in renewable energy as well as road and water infrastructure. These factors translated to bolder hiring intentions, with the index measuring expected employment growth lifting to its highest level since 2Q07. Nevertheless, sentiment remained weaker relative to the longer-term average of 46 index points. While the short-term outlook is encouraging (order books recorded the highest rating since 2014), it is still uncertain if these expectations will fully materialise given broader economic weakness and the public sector's poor track record of delivering on infrastructure projects.
Also on Friday, private sector credit extension (PSCE) for May will be released. In April, PSCE growth slowed marginally to 7.1% y/y from 7.2% in March (and 8.3% y/y in February). The slowdown reflected a moderation in household credit from 7.2% to 7.1%, while corporate credit extension remained steady at 7.1%. Growth in corporate credit was supported by instalment sales, which quickened to 13.2% from 11.7% previously, while investments declined by 11.7%, better than the 15% decline in the previous month. Mortgage extension slowed marginally to 6.5% from 6.6% previously. From the household perspective, both secured and unsecured credit growth slowed in April. Within secured credit, mortgage extension slowed to 6.4% from 6.6% previously, and instalment sales (predominantly vehicle finance) to 7.8% from 8.1% in March. Overall, secured credit recorded 6.7% versus 6.9% in the previous month, and has been decelerating steadily from its peak of 7.7% in July 2022. Unsecured credit cooled to 7.9%, from 8.3.% in March, coming off a peak of 10.2% in January 2023, dragged lower by general loans and advances.
Lastly, the nominal trade balance data for May will also be released on Friday. The trade balance (not seasonally adjusted) amounted to a surplus of R3.54 billion in April, reflecting a reduction from a surplus of R6.30 billion in March. Exports increased by 7.6% y/y to R163.82 billion, while imports increased by 17.6% y/y to R160.28 billion. The YTD cumulative trade balance amounts to a deficit of R3.51 billion, compared to a surplus of R78.01 billion in the corresponding period last year. Exports are up by 5.5% y/y, while imports are up firmly by 21.5% y/y on a YTD basis.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 20 Jun | SA | Leading Business Cycle Indicator | Apr | 110.3 | 111.5 |
| 21 Jun | SA | CPI m/m | May | 0.2 | 0.4 |
| SA | CPI y/y | May | 6.3 | 6.8 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 27 Jun | SA | Quartely Employment Statistics y/y | 1Q | -0.9 | |
| 27 Jun | SA | FNB/BER consumer confidence index | 2Q | -23 | |
| SA | PPI m/m | May | 0.0 | ||
| SA | PPI y/y | May | 8.6 | ||
| 30 Jun | SA | FNB/BER building confidence index | Q2 | 42 | |
| SA | Private sector credit extension y/y | May | 7.1 | ||
| SA | Trade balance (Rand billion) | May | 3.54 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 75,105.79 | -4.4% | -2.1% | 14.3% |
| USD/ZAR | 18.52 | 1.6% | -3.6% | 16.4% |
| EUR/ZAR | 20.28 | 1.7% | -1.9% | 20.7% |
| GBP/ZAR | 23.61 | 1.4% | -0.9% | 21.0% |
| Platinum US$/oz | 923.00 | -6.3% | -11.9% | -0.4% |
| Gold US$/oz | 1,913.52 | -2.3% | -3.1% | 4.1% |
| Brent US$/oz | 74.14 | -2.0% | -3.5% | -33.6% |
| SA 10 year bond yield | 10.69 | -0.5% | -4.9% | 5.5% |
FNB SA Economic Forecast
| Economic Indicator | 2020 | 2021 | 2022 | 2023f | 2024f | 2025f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | -6.0 | 4.7 | 1.9 | -0.1 | 1.1 | 1.8 |
| Household consumption expenditure % y/y | -6.1 | 5.8 | 2.5 | 0.8 | 0.9 | 0.9 |
| Gross fixed capital formation % y/y | -14.6 | 0.6 | 4.8 | 4.2 | 3.0 | 4.2 |
| CPI (average) %y/y | 3.3 | 4.5 | 6.9 | 6.2 | 5.5 | 5.0 |
| CPI (year end) % y/y | 3.1 | 5.9 | 7.2 | 5.8 | 4.9 | 5.0 |
| Repo rate (year end) %p.a.* | 3.50 | 3.75 | 7.00 | 8.50 | 8.25 | 7.00 |
| Prime (year end) %p.a.* | 7.00 | 7.25 | 10.50 | 12.00 | 11.75 | 10.50 |
| USDZAR (average) | 16.60 | 14.80 | 16.40 | 18.80 | 18.00 | 17.50 |
Source: FNB
