Weekly economic wrap: GDP, rand, current account and business confidence

It was a busy week on the data front with news about a slight increase in gross domestic product (GDP) in the second quarter, the current account deficit narrowing, business confidence edging higher, new vehicle sales slumping and the rand staying under R18 to the dollar.

Tracey-lee Solomon, economist at the Bureau for Economic Research (BER), says as a small open economy, international developments affect South Africa, but if the country tackles domestic challenges, these impacts can be minimised.

“On Wednesday, the International Monetary Fund’s (IMF) report on South Africa following its July visit and discussions with National Treasury officials brought these challenges into focus. The July visit was part of a post-financing assessment of the $4.3 billion loan granted in 2020 to mitigate the impact of Covid-19.

“The IMF recognised South Africa’s resilience but stressed the need for reforms to tackle rising debt, high unemployment, declining gross domestic product (GDP) per capita, inequality and poverty. They recommended a 3% GDP expenditure-based consolidation over the next three years to stabilise debt, with the goal of reducing debt to 60-70% of GDP within 5-10 years, while protecting vulnerable groups. In the end, the IMF judged South Africa’s ability to repay the loan as adequate.”

JSE, the rand and gold

South Africa’s JSE Alsi fell by 2.8% week-on-week, despite positive economic growth in the second quarter and improved business sentiment in the third quarter. Gold remained close to record highs as the market appears uncertain whether faster-than-expected US interest rate cuts would be positive or negative and gold remains a good hedge.

The rand performed well, appreciating against the dollar, euro and pound sterling, aided by broader dollar weakness, Solomon says. Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say the rand extended its gains on Thursday after lacklustre US labour market data bolstered risk sentiment and fuelled expectations for deeper rate cuts by the Federal Reserve.

The local currency was trading at R17.68 on Friday afternoon after closing at R17.69/$ against the dollar on Thursday.

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Slight GDP increase

Tshidiso Mofokeng, trainee economist at the BER, says GDP expanding 0.4% in the second quarter was in line with their expectations and a fraction below consensus. “Household consumption was the bright spot, growing at the fastest pace since the fourth quarter of 2021, but fixed investment contracted by 1.4% for the fourth consecutive quarter, while net exports also weighed on growth.”

Matshego and Nkonki say gross domestic expenditure (GDE) did the heavy lifting, driven by a recovery in household consumption expenditure, faster growth in government consumption expenditure and inventory accumulation.

“GDP outcomes in the second quarter suggest that the worst of the downturn is probably behind us. We expect the recovery to gain moderate traction over the year’s final stretch before strengthening and broadening throughout 2025 and 2026.

“The boost will likely come from continued improvements in consumer demand as inflation falls further and interest rates start to decline, bolstering real incomes and lowering borrowing costs. An added boost could also come from households’ access to contractional savings enabled by the two-pot retirement system.”

However, Matshego and Nkonki say, that slower growth in government spending and weak fixed investment will likely contain the boost provided by more robust consumer spending to GDP during the remainder of the year. “Altogether, we forecast GDP growth of around 1% in 2024.”

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GDP increase not robust, but positive

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say while not robust, GDP growth was positive given the challenges faced by both consumers and businesses.

“With the right policies and easing constraints, this offers hope that boosting the country’s growth potential remains feasible. However, cyclical weakness in demand persists, limiting the ability to significantly spur production increases, even though energy and, to some extent, logistics constraints have eased.”

In addition, they say, poor service delivery at the municipality level, as well as deteriorated infrastructure continue to hinder economic performance. “Considering this, a load-shedding-free environment will be crucial for a sustained recovery. Over time, as demand conditions improve, the productive sectors should respond with higher output.”

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Current account deficit

The current account deficit narrowed to 0.9% of GDP (R64.6 billion) in the second quarter, a fraction below the expected shortfall of 1% of GDP. The value of exports increased thanks to higher prices, while imports climbed owing to a lift in the volumes and prices, Mofokeng says.

According to Matshego and Nkonki they expect a smaller trade surplus during the remainder of the year. “Imports will likely rebound by more than exports. Imports will get a boost from the ongoing recovery in domestic demand as consumer spending accelerates amid rising real incomes and lower interest rates.

“The current account deficit is forecast to average 1.2% of GDP in 2024, down from 1.6% in 2023. However, the bulk of the improvement is behind us, and we now expect the current account deficit to widen marginally in the second half of the year.

“The drag will come from the anticipated rebound in imports, while domestic inefficiencies will still undermine the upside for exports.”

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say this data suggests that the deterioration in the current account deficit that is anticipated for this year may be limited. “However, logistical constraints remain a key hindrance to export growth and alongside rising domestic demand, increases the odds of worse current account dynamics over the medium term.”

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Business confidence increased marginally

The RMB/BER Business Confidence Index (BCI) increased marginally to 38, the best level since the fourth quarter of 2022, but it is concerningly that activity across the surveyed sectors remained subdued amid logistical bottlenecks and other underlying factors weighing on demand, he says.

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano point out that while the index still reflects the impact of weak demand, it also suggests that conditions have improved, especially with the cessation of load shedding and businesses are more upbeat on the outlook, although structural issues around crime and the state’s inefficient delivery of services could remain an impediment on overall sentiment.

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PMI plunged after strong start

The Absa PMI plunged by 8.8 points to 43.6 in August after a strong start to the third quarter and Mofokeng says the fall in business activity and new sales orders signalled weak demand and weighed on the health of the manufacturing sector relative to a strong July.

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say optimism on near-term conditions nevertheless prevails and the prospect of lower purchasing prices, amid falling fuel prices, suggests that the operating environment will continue to improve. “We remain concerned about supplier ability to manage rising demand given local logistical constraints.”

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New vehicle sales disappointed again

After a 1.5% annual gain in July, domestic new vehicle sales fell by 4.9% in August, according to Naamsa. Mofokeng says it is concerning that vehicle export sales slumped by 34.3% year-on-year in August due to sluggish economic activity in the Eurozone, a key trading partner.

Matshego and Nkonki say the outcome was worse than their forecast of 0.2%. They believe the weakness was driven by sharply lower light, heavy and extra-heavy commercial vehicle sales, with a total of 43 588 vehicles sold compared to 44 229 the previous month.

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say the fact that total vehicle sales are down 6.0% compared to the same period last year, reflects broad-based weakness across segments amid subdued confidence, weak economic performance, and high interest rates.