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.

Second repo rate reduction

Debt-laden South Africans would have been disappointed at the meagre 25 basis point reduction of the repo rate by the Monetary Policy Committee (MPC) at the end of November, which has automatically lowered the prime overdraft rate to 11.25%. Although any interest rate decline is beneficial for lowering debt servicing costs and, as an inference, also for stimulating economic demand the weariness in loosening the restrictive monetary policy over the past two years continues to impede economic growth.

Due to the sharp decline in the consumer price index (CPI), monetary policy has, in fact, become even more restrictive. The increase in the real prime rate (prime minus CPI) – now at 8.5% – is one of the highest commercial lending rates in the world. What is even more perplexing from the perspective of the quest for higher economic growth, is the fact that the real prime rate stood at 5% at the beginning of 2020 (before the Covid pandemic), which means that the cost of credit (and of capital) in South Africa has now increased by 69%. Hopefully, the MPC will lower rates further in early 2025, which is an important trigger to lift the country’s growth rate and create more jobs.

The construction sector boosts job creation

Following two quarters of stagnant job growth, the economy finally managed to expand employment between July and September, adding 122,000 jobs in the formal sectors and another 165,000 jobs in the informal sectors (non-agricultural). The only downside to the data in the latest Quarterly Labour Force Survey by Statistics S.A. is the marginal decline in formal sector jobs on a year-on-year basis.

It is encouraging that the construction sector outperformed all the industry groups in the private sector during the third quarter, raising employment by 176,000. Construction represents the most labour-intensive sector of the economy.

The Government of National Unity’s (GNU) new-found commitment to cooperate with the private sector in repairing and expanding the country’s logistics infrastructure seems to be bearing fruit. More progress with job creation can be expected in 2025 once the latest measures to combat the so-called “construction mafia” are implemented.

S&P PMI for South Africa on the rise

The uptick in the S&P Global Purchasing Managers’ Index (PMI) for South Africa for October was a welcome forerunner of the decision on 15 November by S&P Global Ratings to revise its outlook on South Africa’s sovereign debt from stable to positive. The ratings agency has also upgraded Eskom’s ‘B’ long-term global-scale foreign and local currency ratings from stable to positive.

Eskom has welcomed this decision, with the utility’s CEO, Dan Marokane, stating that the credit rating upgrade underscores the progress made in restoring the utility’s financial health and operational reliability. Eskom also stated its intention to continue implementing generation recovery, whilst strengthening governance and tackling crime and corruption.

Key findings in the October PMI include signs of improving demand and falling cost levels, supported by a robust level of business confidence. The majority of firms surveyed expect output to continue rising, with anecdotal comments suggesting that lower interest rates, political stability and reduced load shedding contributed to positive growth predictions.

Building activity on the mend

The past two quarters have witnessed a welcome increase in both the value of building plans passed and buildings completed by metros and larger municipalities. As a direct (and predictable) result of the lockdowns during the Covid pandemic, these two indicators took an unprecedented nosedive in the second quarter of 2020 but managed to recover quite well until the end of 2021, when the restrictive monetary policy stance of the Reserve Bank started to take its toll. Since then, the real values of building plans passed, and buildings completed have declined by 18.2% and 24.6% respectively – one of many costs incurred at the macroeconomic level as a result of the highest interest rates in 14 years.

Fortunately, interest rates have now started a declining trend that could lead to a further recovery of the embattled construction sector. Since the first quarter of 2024, the values of building plans passed, and buildings completed, have increased by 21% and 46% respectively (in real terms), albeit off a low base.