Monthly macro and economic insights report

Our monthly To the Point column by economist Dr Roelof Botha offers in-depth analysis and commentary on the latest economic trends, market developments, and financial news. Designed to keep you informed and ahead of the curve, each edition delves into key economic indicators, explores their impact on global and local markets, and provides insights to help you navigate the ever-changing economic landscape.

Inflation drops to a three-year low

The further decline in the consumer price index (CPI) to just above the mid-point of the Reserve Bank’s target range is exceptionally good news for debt-laden households. The CPI has now been comfortably within the target range of 3% to 6% for 14 successive months, signalling the strong likelihood of an interest rate cut in September.

The debate is now shifting from whether the repo rate will be cut to what the scope of the reduction will be. A cut of 50 basis points has become realistic – especially against the background of low economic growth, rising unemployment and households being faced with the highest ratio of debt costs to disposable income in 15 years (9.2%).

Underpinning the optimism over sizeable rate cuts over the next 12 months is the sharp decline in South Africa’s 10-year bond yield. Since the end of April, the country’s benchmark long-term interest rate has dropped by almost 200 basis points – suggesting that the Monetary Policy Committee (MPC) of the Reserve Bank has been conservative, due to the positive long-term correlation between lending rates and bond yields.

A decline in the rates of increase in food, housing, clothing, transport and accommodation represent some of the key drivers behind the relentless decline in the CPI over the past twelve months. Currency strength – which has already led to several declines in fuel prices – is bound to assist in a further lowering of inflation during the rest of the year.

Consumer and producer inflation remain comfortably within SARB’s target range

Source: Stats S.A. Data as at July 2024. Past performance is not a reliable guide to future performance. For illustrative purposes only and not indicative of any investment.

Rand strength continues

South Africa’s currency continued to flex its muscles during August, strengthening by almost 8% against the US dollar over the past six months. Since March, only one currency of the group of 16 key currencies monitored by Currencies Direct managed to outperform the rand, namely the Malaysian ringgit.

Apart from being significantly undervalued until the beginning of 2024, the recovery of the rand has been facilitated by a fairly steep decline in the US dollar index (DXY). The index shed no less than 500 basis points during the nine weeks ended on 28 August. Since reaching a low of 101 index points, the dollar index recovered marginally to 101.7 at the end of August, boosted by higher revised second-quarter GDP figures for the US (3%, from earlier estimates of 2.8%).

At the end of August, the rand’s value of R17.82 against the US dollar was more than 6% stronger than a year ago – aiding the quest for lower inflation and, ultimately, a relaxation of restrictive monetary policy.

Although the DXY is unlikely to shed the volatility that has marked the post-Covid period of restrictive monetary policy, its recent decline could be part of an orderly adjustment cycle as the Federal Reserve in the US prepares to cut rates before the end of the year.

According to an analysis by UBS, the largest private bank in the world, the US dollar is currently premised on a value that has not fully priced in the effects of an accommodating monetary policy stance, but rather a neutral one.  Against this backdrop, UBS has shifted the U.S. dollar to “least preferred” in its global strategy and moved the euro, the British pound, and the Australian dollar to “most preferred”.

Percentage change in values against the US dollar 1 March to 31 August – selected key currencies

Source: X-rates, author’s own calculations. Data published 31 August 2024. Past performance is not a reliable guide to future performance. For illustrative purposes only and not indicative of any investment.

Gold price keeps on breaking records

For the first time ever, a bar of gold is worth more than one million US dollars. This milestone was reached on 20 August, when the spot price of the precious metal broke through the level of $2,500 per troy ounce, an all-time high (the standardised weight of a gold bar is 400 ounces).

Since March, a relentless rise in the gold price has occurred, with the precious metal breaking new records regularly. Traditionally, an inverse relationship exists between US interest rates and the gold price, which is at play again, with the yield on 10-year US government bonds having dropped by 80 basis points since the end of April.

Another reason for the surge in the gold price is the renewed appetite for diversified reserve asset holdings by central banks around the globe, which has gained some traction due to the conflicts in Ukraine and Gaza. During the first two quarters of 2022, total central bank purchases of gold amounted to 121 tons. Two years on, and this demand has shot up by exactly 100% to a level of 242 tons, confirming, once again, gold’s status as a long-term safe haven.

From South Africa’s perspective, the timing of the record gold price rally is good. It comes at a time when several of the country’s other key mining sector export earners are faced with lower prices, coupled with logistics challenges emanating from Transnet. Furthermore, a higher gold price is more often than not associated with domestic currency strength, which will contribute to downward pressure on inflation, and ultimately hasten a lowering of interest rates.

Relentless rise in the gold price (quarterly average)

Source: World Bank, Trading Economics. Data published 29 August 2024. Past performance is not a reliable guide to future performance. For illustrative purposes only and not indicative of any investment.

Loadshedding on the way out

Since the second quarter of the year, a remarkable turnaround has been achieved in the stability of electricity supply, with an absence of rotational loadshedding. Achieving this feat during the winter months, when demand is high, deserves praise, although there is a twist in the tale.

South Africa is not out of the woods yet, as “load reduction” is the latest terminology added to the country’s electricity supply woes. It represents an effort by Eskom to minimise the risk of overloading the power grid. By reducing the load in specific high-density areas with high electricity usage during peak times, the stability of the grid can be retained, preventing widespread blackouts.

Eskom’s CEO, Dan Marokane, has nevertheless expressed optimism that the utility was in a good position to avoid loadshedding during the high-maintenance summer months and that an end to loadshedding could be announced by the end of March 2025, when an additional 2 500 MW in capacity is expected to become operational via large coal-fired units at Kusile and Medupi, as well as at the Koeberg nuclear power station.

Private households and businesses can also give themselves a pat on the back, as their share of total electricity generated in the country has risen steeply, from just above 3% in 2010 to 14%. This rise, mainly attributed to solar power generation, constitutes one of the reasons for the current absence of country-wide electricity rationing.

Share of electricity produced by the private sector

Source: Stats S.A. First quarter 2024 data. Past performance is not a reliable guide to future performance. For illustrative purposes only and not indicative of any investment.

Retail trade sales on the mend

A welcome recovery in the value of retail trade sales occurred at the end of the second quarter, with a real year-on-year growth rate of 4.1% taking the figure to a new record in June (R117 billion at current prices).

Except for hardware, paint & glass retailers, all the other key types or retailers managed to record year-on-year growth rates during the second quarter, with general dealers leading the pack at a sales value of just below R170 billion, followed by textiles, clothing and footwear at R56.7 billion for the quarter. Due to paltry GDP growth, record-high interest rates, and stagnant new job creation, the retail sector has been under strain over the past two years, with June’s real year-on-year growth rate being the highest in 23 months.

Real retail trade sales at constant 2024 prices

Note: Four-quarter average. Source: Stats S.A., author’s own calculations. Data as at 29 August 2024. Past performance is not a reliable guide to future performance. For illustrative purposes only and not indicative of any investment.

Trade surplus expands further

Since February, South Africa’s exports have managed to exceed imports by a healthy margin, resulting in a cumulative trade surplus for the first seven months of the year of R85 billion. During 2023, the country’s trade balance remained in deficit until May.

In July, total exports amounted to R175 billion – the second largest value for the year, with the cumulative figure for 2024 breaching the R1 trillion level to reach R1.16 trillion, on par with last year’s cumulative exports. The top five export-performing groups thus far in 2024 are: minerals (R303 billion); precious metals (R210 billion); agriculture & food (R146 billion); vehicles (R138 billion); and base metals (R124 billion).

Combined with a sizeable surplus on the financial account of the balance of payments during the first quarter of the year and a sustained increase in the value of foreign exchange reserves, South Africa is currently enjoying fundamental monetary stability.

South Africa’s cumulative trade balance in 2024

Source: SARS. Data published 29 August 2024. Past performance is not a reliable guide to future performance. For illustrative purposes only and not indicative of any investment.