Commodity currencies: afflicted by sticky inflation

Commodity currencies have generally weakened since November on a year on year basis, although the Brazilian real continues to prove the exception,  still up 1.7% y/y, and 10% since the start of the year, aided by its strong export-led performance.    

However, compared to a month ago all the commodity currencies are generally weaker, with the rand leading the pack at -9.1% depreciation m/m, and this has been the case both this month so far, and the last week of April.  

Commodity prices have seen a varied performance over the month, with energy prices strongly up on both the year and month, but  most metals prices lower, and food prices seeing a mixed outcome. Most commodity prices are however higher y/y.

The World Bank has said that “the war (in the Ukraine) … will likely shave a full percentage point off global growth in 2022, … having delivered the largest commodity-price shock we’ve experienced since the 1970s.”

Additionally, “global patterns of trade, production, and consumption of commodities (have shifted) in ways that might keep prices high for years.  Many countries are turning away from Russia as a coal and oil supplier and have been finding alternatives in more distant locations.”

“For nearly thirty years, greater trade, investment and innovation bolstered an unprecedented era of prosperity—and brought the world closer to ending extreme poverty.” “Incomes of the poorest nations … narrowed the gap with the wealthiest.” 

The IMF in turn warns that “rising protectionism is exacerbating chaos in global food markets brought on by the war in Ukraine, with governments clamping down on exports of staples including grains, cooking oil and pulses”.    

This is echoed by the European Bank for Reconstruction and Development (EBRD), which highlights that increased protectionism artificially boosts prices, which are already at record levels, fueling global food insecurity, and “increaseing global poverty rates.”

Climate change and the impact of Covid-19 has also increased protectionism on food exports, and so prices, fuelling global inflation, with these effects not yet at an end. Commodity currencies afflicted by curbs on their countries’ commodities exports have tended to dull.

The official unemployment rate rose by a further 0.4% points in Q4.21 and by a notable 2.8% y/y to 35.3%, the highest rate since the commencement of the Quarterly Labour Force Survey (QLFS) in 2008.

A breakdown of the numbers reveals that the labour force grew by 2.5% q/q, with fewer individuals previously characterised as “not economically active”, while the number of those employed only rose by 1.8% y/y, leading to the raised unemployment figure.  

The informal sector was, however, the only segment of the economy to record a decline in employment numbers during the quarter. Specifically, the number of employed within this category fell by 48 000 or -1.8% q/q. When measured on a year-on-year basis however informal sector employment has grown by a notable 5%, attracting those who perhaps lost their formal sector jobs or businesses during the severe lockdown restrictions imposed by the State.

Conversely formal sector, non-agricultural employment rose by 1.5% when measured on a quarter-on-quarter basis, but is down a marked -6.9% y/y.   

A disaggregation of the data on an industry basis, indicates that five of the eight industries surveyed within the formal sector (non-agriculture) reported a lift in employment. The trade sector recorded the largest number of job gains at 92 000 over the quarter, followed by the community and social services sector (84 000).  Q4.21 generally sees a seasonal pick-up in employment, particularly in the tourism, hospitality and related sectors.   

The expanded unemployment rate, (which includes individuals who desire employment regardless of whether they are actively seeking work) declined marginally to 46.2% but is a marked 17.5 percentage points higher than the rate logged during the same period in 2008, evincing the extent of SA’s growing unemployment crisis.  

The youth category (15-24 years), a priority area of government, which has been particularly affected by the country’s mounting unemployment problem remained elevated at 66.5% in Q4.21. Indeed, a focus on improving the quality of and access to education remains essential. Indeed, according to Stats SA of the 7.9 million unemployed persons in Q4.21 “as many as 51,6% had education levels below matric”.

Government outlined measures to increase employment in its State of the Nation Address, stating that a primary “task of government is to create the conditions that will enable the private sector – both big and small – to emerge, to grow, to access new markets, to create new products, and to hire more employees.” February’s Budget Review followed on from this tabling expenditure priorities in this regard.

The SARB’s monetary policy committee (MPC) opted to hike the repo rate by a further 25bp to 4.25%. Three of the MPC members were in favour of a 25bp hike, with two preferring a more hawkish 50bp rise.          

Overall risks to the inflation trajectory have risen, underpinned predominantly by higher fuel and food prices and accordingly the Reserve Bank has revised its headline consumer price inflation projection significantly higher for this year. Specifically, CPI is now projected to reach an elevated 5.8% in 2022 (from 4.9% previously). This is ahead of the average and market-based surveyed expectations of future inflation of 5.1% y/y and 5.5% y/y respectively.

Core inflation expectations have also been raised, with a reading of 4.2% anticipated for 2022 (3.8% y/y previous estimate), 5.0% y/y in 2023 (previously 4.4% y/y) and 4.7% y/y in 2024 (previously 4.5% y/y).

The highly volatile oil price, a major commodity import, has risen markedly on the back of the conflict between Ukraine and Russia and remains a key upside risk to the inflation outcome. The SARB has accordingly increased its oil price forecast for this year to a marked US$103/bbl (average). 

Food price inflation which makes up the largest portion of the CPI basket was elevated before the onset of the war between Russia and Ukraine. Specifically, international agricultural food prices have been driven higher by increased demand, poor weather conditions in certain geographies leading to supply constraints. Supply concerns have further been exacerbated by the geo-political situation, exerting upward pressure on a number of agricultural commodities like grains and oilseeds and key inputs like fertilizer. Indeed, “Russia is the world's leading exporter of fertilizer materials, accounting for 14% of global exports in value terms”, according to Agbiz. 

The domestic currency has appreciated somewhat, “despite less favourable global conditions”, buoyed by robust commodity export prices which has “helped to dampen price pressures”, according to the SARB.  Accordingly, the implied starting point for the rand forecast has been adjusted to R15.41 to the greenback, versus R15.60/USD previously (January meeting).  

Global growth is expected to decelerate this year on heightened geo-political tensions and renewed lockdown restrictions in parts of Asia in response to rising covid-cases. Specifically, the SARB has amended its global growth forecast notably to 3.7% (from 4.4%) for 2022. Risks to this forecast remain, depending on the length and severity of the war in Eastern Europe.  

Conversely, the SARB has revised upwards, albeit moderately, its GDP forecast for the South African economy to 2.0% for 2022, from 1.7% previously, underpinned by a number of factors, including robust export commodity prices and a higher than anticipated Q1.22 GDP outcome. Rates of growth for 2023 and 2024 are projected at 1.9% respectively.  Electricity supply constraints and sluggish reform implementation remain key impediments to growth. The SARB continues to evaluate the risks to the medium-term domestic growth outlook to be balanced.  

“Economic and financial conditions are expected to remain more volatile for the foreseeable future. In this uncertain environment, policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook,” the SARB stated.

The value of buildings reported as completed by larger municipalities fell by a notable -27.1% in real terms when measured on a quarter-on-quarter seasonally adjusted basis (qqsa). While all segments of the market contracted over the period, sharp declines in non-residential building completions and the additions and alterations category were largely responsible for the decline, sliding by -54.2% and -36.0% respectively.  

Conversely, building plans passed were up 19.0% qqsa, buoyed primarily by the residential segment, which increased by 32.4% qqsa. The Western Cape has benefited from the notable semigration trend, however climbing interest rates is likely to curb buyer demand. Indeed, the Russian/Ukrainian conflict is expected to place upwards pressure on inflation, which was already very high in many countries before the conflict, with governments around the world tightening monetary policy in response.

Pipeline activity within the non-residential category also rose by a moderate 9.4% qqsa. The non-residential sector of the market which was badly impacted by the pandemic induced restrictions is expected to recover as employees return to the office. However, a return to pre-pandemic conditions in the short term is unlikely as a hybrid working culture is becoming the ‘new normal’.           

Indeed, according to the BER’s latest building survey, confidence of non-residential builders as measured by the FNB/BER Building Confidence Index rose to 39, from 33 previously, with survey participants’ “expectations for next quarter in terms of activity” optimistic.

Pipeline activity within the additions and alterations category however fell by -2.4% qqsa. Specifically, the work from home dynamic, which led to a strong pick-up in home improvement activity has subsided. This can be further evinced by the retail trade numbers which showed that hardware paint and glass retailers recorded declines in activity of -5.4% y/y and -10.6% y/y in December and January respectively.     

Business confidence increased modestly in Q1.22 but remained subdued at 46. The government’s plans to improve the ease of doing business, focus on job creation, infrastructure development and deal with the electricity supply constraints in the country should aid in boosting business confidence going forward which is vital for increasing investment and growth.

Last night’s Federal Open Market Committee (FOMC) meeting saw the target range for the federal funds rate rise to 0.25% to 0.50% as widely expected , and the committee highlighted that it “anticipates that ongoing increases in the target range will be appropriate”.

Additionally, the Fed will begin to reduce its holdings of US treasuries (and agency debt) on its balance sheet, the accumulation from its QE programme at an upcoming meeting (likely May). All the members voted for a hike, with even one preferring 50bp instead of 25bp.

The statement added that the implications of the Russian/Ukraine war “for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity”.

Indeed, the Fed Chairman remained focused on inflation without economic growth concerns, and indeed was very confident on economic growth with little expectation of a recession in the US. Markets reacted positively to his comments, with risk-off receding materially.   

Risk assets benefited from the very positive reading of the US economy, with Chairman Powell specifically saying “the economy is very strong”,  “aggregate demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond.”

“Although the invasion of Ukraine and related events represent a downside risk to the outlook for economic activity, FOMC participants continue to foresee solid growth of … 2.8 percent this year, 2.2 percent next year, and 2 percent in 2024.”  

While the US rate hike was expected, the tone of the FOMC statement was very hawkish with heightened concern about further future inflationary pressures, concluding “we are attentive to the risks of potential further upward pressure on inflation and inflation expectations.”

Also at the conclusion of Chair Powell’s press conference he highlighted for the third time that the “American economy is very strong”, finishing with the statement that the US is consequently  “well positioned to handle tighter monetary policy”.

The South African Reserve Bank is expected to hike the repo rate by 25bp on the 24th, following on from the Fed’s hike last night, and the FRA curve has fully factored this in, but the positioning for a 50bp hike has come out of the system over the past few weeks.     

The FOMC projection shows the target range for the federal funds rate at 1.75% to 2.00% this year, which is a substantial ramp up from December’s projections of a range of 0.75% to 1.00% the last time the Fed’s interest rate forecasts were published (December 2020). 

With the Fed’s funds rate currently in the 25bp to 50bp range, this implies a hike at every FOMC meeting this year of 25bp, with six meetings remaining in the year. This aggressive rate hike cycle has been presented in order to squash forty decade high US inflation.  

South Africa’s FRAs have fully factored in a 25bp lift the repo rate this month, and are building in another one for May and yet another for July, and indeed a 25bp hike is factored in by the markets for every MPC meeting this year, if not 50bp hikes at some MPC meetings. 

The MPC often follows the FRA curve at a meeting, but FRA curve expectations are volatile and change often, and so the future expectations out to twenty-four months have less effect than the nearest months reading on the SARB’s interest rate decision. 

Also supportive of a March 25bp lift in SA’s repo rate is the 25bp hike last night in the Fed funds target rate, with the SARB mindful of the need to maintain the interest rate differential between the US and SA in order to prevent very severe rand depreciation.

The rand today reached its strongest level this year, at R14.89/USD, with financial market sentiment buoyed by the Fed’s strong economic outlook, bolstering risk assets. However, there is still uncertainty on the effects of the war, but the outlook for ceasefire is improving.

Calming commodity prices have reduced SA’s expected fuel price hike for April, pulling it back towards R2.00/litre and likely eventually below this as oil prices subside to a degree and the rand has seen mild strength, although there is another 15 days still for the price determination.

With heady inflation pressures from wheat and fuel prices (with around a quarter lag for wheat) and a month for fuel prices, April is currently expected to see a R2.15/litre, R2.95/litre and R2.51/litre hikes in petrol, diesel and paraffin prices respectively without state intervention.

The winter wheat harvest in SA will not cover domestic demand, with SA importing about 50% of its needs, and this expected price elevation risks higher Q2.22 and Q3.22 inflation figures from this source if prices do not moderate instead, heavily pushing up bread prices.

The state could institute bread price controls in extremis, but on a longer term basis this would risk limiting supply. The perceived progress towards a ceasefire has cheered markets, and investors have retreated from safe havens, with the gold price moderating.

However, the Russian/Ukraine war will still have a negative effect on affected crops, and so their prices, along with oilseed crops (particularly sunflower), and also soyabeans which is significantly used in animal feed, all likely contributing to higher food price inflation in SA. 

While commodity prices saw some moderation in recent days as markets had worried about a lengthier war and a further dimming in global economic growth prospects, there is also a high level of uncertainty, driven also by the recent Chinese lockdowns on new cases. 

Global financial market investors have been spooked by rising risks in different geographies, and policy maker support will be key to weather the crises. China’s planned growth stimuli and market measures has had some recent calming effect, with the rand targeting R15.00/USD again. 

The war in the Ukraine and the hard lockdowns in China will still have lingering negative effects on supply of goods, which will keep prices relatively elevated, even if the recent panic pricing ascent has subsided for many, and levels are back to a few weeks earlier for a number. 

Commodity prices were elevated before the war began on 24th February, and while many have returned to levels around 22nd February, still relatively high prices (even excluding the price hump of early March), will keep SA’s inflation above 5.0% y/y for the majority of 2022.

The Russian/Ukraine war’s effect on energy and food prices is already likely to weaken European and global 2022 GDP growth forecasts from January. But substantially worse would occur should the war drag on, particularly in the absnece of supportive policy measures by governments and central banks. 

An EU summit today is expected to discuss a new investment and growth package, with measures to alleviate the war’s effects, which reduced some stress in financial markets. But the measures are unlikely to  mitigate all of the downwards pressure on global growth. 

There are three scenarios for the Russian/Ukraine war:

1. The unlikely scenario of a fairly quick war

2. A war that persists through March and well into Q2.22 (the expected case)

3. A war in which NATO countries become actively involved, i.e. WWIII (an outcome with around half of the probability of scenario 2)

Our expected case scenario does not include an extremely protracted war between Russia and the Ukraine into 2023, nor a nuclear war or WWIII. 

Russia may settle for an agreement where it regains part of the Ukraine and possibly other territories, but talks have not proved productive so far. Estimates view Russia running into severe financial difficulty by June as heavy sanctions and oil bans bite. 

The rand strengthened today on expectations of European stimulus packages. Hopes that talks between Russia and the Ukraine would bear fruit also lent short-lived support to the currency until Russia rejected the Ukraine’s proposals.    

Financial markets were also likely cheered by signals that the FOMC may reduce the speed of its withdrawal of supportive monetary policy to counter negative growth effects and uncertainty.

The oil price dropped to US$115.5 today (R111.1/bbl yesterday). Should the rand’s recent strength persist, this would reduce the R2.44/litre petrol price hike building for April (diesel R3.35/litre), but not eliminate it, with state intervention needed. 

We expect SA’s average CPI inflation rate for 2022 to be 5.5% y/y, ending the year close to 5.0% as commodity prices weaken after the Russian/Ukraine conflict. We now anticipate a SA’s 2022 GDP growth at 1.6% y/y, weighted down both by slwoing global growth and SA specific factors, including electricity shortages and slow policy reforms.

The RMB/BER business confidence index (BCI) rose to 46 in Q1.22, from 43 in Q4.21, meaning 54% of businesses were dissatisfied with prevailing business conditions, and the reading in negative territory still, i.e. below the neutral 50 level. The outcome is in line with the long-term average of the index, which is also 46. 

With the Q1.22 BCI survey taking place between 9th to 28th February, it has been influenced by the advent of the Russian/Ukraine war on 24th February. Both upwards inflationary pressures and a negative economic growth impact are likely from the war, while stress has increased in global financial markets. Markets still anticipate substantially higher interest rates in SA this year and next, which is likely adding to the depressed nature of the business confidence reading in Q1.22 (below 50 signals a depressed confidence environment). 

Businesses consequently will worry about the ebbing purchasing power of consumers, and global growth forecasts will likely be revised down. Markets and policy makers have been viewing the Russian/Ukraine conflict as more of a temporary supply disruption than a severe threat to global growth, but (likely) downward adjustments in economic growth expectations could see more risk aversion in global financial markets. 

Uncertainty is high, and the Russia/Ukraine war has persisted for longer than markets initially expected, driving up commodity prices and seeing SA’s value of economic transactions rise substantially on these high commodity prices, recording a consequent upswing in the domestic business cycle in Q1.22 on a rand basis.

Manufacturing, wholesale and vehicle dealership activity increased in Q1.22, the latter impacted by improved stock levels with the global supply chain showing improvement in deliveries from Q4.21. Wholesale sales were driven by commercial demand for machinery and chemicals on the impact of strong commodity prices for the agricultural and mining sectors. Manufacturing benefited from improved exports and domestic demand.

However, global growth is now at risk of weakening into, and over, Q2.22 and so have a future negative impact on SA’s economic performance, which is heavily influenced by the performance of the global economy. 

Adding “we are attentive to the risks of potential further upward pressure on inflation expectations and inflation itself from a number of factors.  We will use our policy tools as appropriate to prevent higher inflation from becoming entrenched.”

Powell’s “Semiannual Monetary Policy Report to the Congress” speech addressed “Russia's attack on Ukraine” and highlighted that “the implications for the U.S. economy are highly uncertain, and we will be monitoring the situation closely.”

The Russian/Ukraine war is not expected to derail the planned normalisation of US monetary policy currently, with Powell also confirming that the FOMC will reduce the size of the Fed’s balance sheet after it has begun hiking rates, and has phased out QE.   

However, he added “the near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain. Making appropriate monetary policy in this environment … means we will need to be nimble.”

President Biden’s recent State of the Union Address (SOUA) also highlighted strong inflation concerns, stating “inflation is robbing … (Americans) of the gains they might otherwise feel”, “that’s why my top priority is getting prices under control”. 

The US ten-year treasury yield climbed 17bp on the news, and the implied fed funds futures rates strengthened to fully factoring in a 25bp lift at the March FOMC meeting, after the market rate view had seen some recent weakening as the Russian-Ukraine war intensified.

US inflation climbed to a heady 9.7% y/y for PPI for the month of January (from 9.1% y/y), and 7.5% y/y for CPI (previously 7.3% y/y), with the US breakeven rate reaching 2.73% from 2.36% in January, spurred higher also by the inflation releases.       

The obdurately high inflation in the US has clearly created concerns that the pressures would become broad based, embedding into price systems. Today the US ten year yield rose further, to 1.87% (from 1.52% yesterday, 1.34% on Tuesday) as markets price in further hikes.

The seasonally adjusted (SA) headline Purchasing Managers’ index (PMI) climbed a further 1.5 points to 58.6 in February, notably ahead of consensus expectations (Bloomberg) of a decline to 56.3.

The result was supported by a strong pickup in all subcategories. Specifically, new sales orders jumped to 56.9 from 55.5 previously: “the quickest increase in new sales orders since the second quarter of 2021,” according to the Bureau for Economic Research (BER). A further improvement in exports was likely a significant contributing factor.

Moreover, business activity grew by a further 3.0 points to a notable 59.6 in February on a likely pick-up in demand as COVID-19 restrictions remain lenient, supporting sentiment. According to the BER, the average level for the first two months of 2022 is well above the final quarter of 2021.

While this is positive for the trajectory of the manufacturing sector, renewed bouts of load shedding remain a risk, while rising geo-political tensions globally could affect international trade at a time when supply side constraints are still a key issue.     

February’s pleasing result also saw the employment gauge lift, moving into expansionary territory (above 50).  

The index measuring expectations with respect to future business conditions lost a bit of ground but remained elevated at 69.5, after reaching an “almost four-year high” in January.

The purchasing price index however climbed moderately, rising to a marked 89.8. Additional fuel price hikes are likely to continue adding to manufacturing cost pressures. Indeed, marked increases in both petrol and diesel prices are expected tomorrow and with the oil price climbing -- and the domestic currency vulnerable to portfolio outflows on global risk aversion -- we will likely see further fuel price hikes going forward.    

Depending on how the Russian Ukrainian conflict plays out longer term, risks to the global outlook remain, even as major economies are putting the worst effects of the pandemic behind them.

Financial markets have been roiled in recent days by the escalating crisis in the Ukraine, pushing up the Brent crude oil price rising to US$97/bbl yesterday (rand R15.17/USD) and today to US$102/bbl (R15.37/USD) with the potential for further escalation. 

For SA, which imports oil instead of exploring and extracting its own, higher oil prices would push up inflation substantially. The petrol price, already at R20/litre, could jump to R25/litre in the near term. A R1.26/litre increase is building for March -- a figure that would be would be significantly higher were it not for some rand strength earlier in the month.

South Africa’s trade surplus, currency and government finances have all benefited from the strong export value of commodity prices in the past eighteen months. SA is a key commodity exporter (chiefly of metals, minerals and agricultural products), but an escalation in hostilities in Eastern Europe could see commodity prices falling as markets anticipate lower economic growth.

OPEC+, however, keeps its oil prices high by quota controls, and has already demonstrated supply shortage this year, bolstering the oil price above US$80/bbl even before the conflct began. 

Russia is a key oil and gas exporter, and there may be little coincidence in the timing of hostilities, with the Ukraine now in the depths of the Northern Hemisphere winter and Europe heavily reliant on oil, coal and gas. 

The increased likelihood of war presages further supply shortages in an already tight market. Precious metals have gained significantly on safe haven flows, but some other (non-energy or precious metal) commodity prices have dropped.

The futures market for commodities has been running very high this year, especially contracts for immediate delivery. But further escalation in military conflict, particularly one which draws in other countries in region and beyond, is likely to yield a slump, leading commodity prices lower.

Russia is expected to push its objectives and persist with its aggressions, but these could wax and wane on interactions with the US/UK and others involved in attempting a peaceful resolution.

Food price inflation has started rising again, at 5.7% y/y in January, up from 5.5% y/y in December, and excluding non-alcoholic beverages is at 6.2% y/y, up from 5.9% y/y in December.

Food prices have been subject to increased production costs and pushed higher by elevated commodity prices globally. International agricultural food and non-food prices also been impacted by supply chain constraints and strong demand. Domestic production has seen mainly imported fertilizer, herbicides and insecticides prices rise by over 50% in the 2021/22 planting season (Agbiz).

This has made crop losses from flood damage very costly, while the La Nina weather phenomenon has seen some areas become too wet to replant at all. In turn, this has pushed up animal feed prices for grain and soybean, although pastures have seen substantial benefits for grazing.

Globally supply has battled to keep up with demand for fertilizer, chemical prices have risen sharply as have energy costs for transporting goods, and Agbiz also warns “the winter crop producers of South Africa could experience higher input costs as was the case for the 2021/22 summer crop planting season. Such conditions would overshadow the profits of the 2021/22 large crop”.

Oil prices at over US$90/bbl are not expected to subside in the immediate term, higher than a month ago when they were closer to US$85/bbl (in January), and US$73/bbl in December with this having been only a temporary moderation in the upwards fuel price climb over most of 2021.

January’s petrol price easing was largely reversed in February, and a further price hike of up to R1.20/litre is currently seen for March, although government does use the slate levy to absorb sudden fuel price changes as well, and this particularly occurred in February when the under recovery was running well above R1.00/litre, and at times closer to R2.00/lite but government did not pass it through.

The slate levy is used to smooth the fuel price, and the petrol price increase in March may be around 60c/litre again, even though the under recovery is much bigger, but government is likely again not to pass it all through.

Core CPI inflation, which excludes food and non-alcoholic beverages, fuel and energy prices from the CPI), came out at a very subdued 3.5%, reflecting the heavy commodities impact on SA prices.

Despite slower economic growth in most economies, following last year’s heady rebound, the world’s economic recovery remains on track to reach pre-pandemic levels by year-end. But the global macro-economic environment this year will be the least supported by policy measures since the pandemic began, and this has already weighed on levels of economic activity in January, with knock-on impacts for commdity price growth.

The recent gain in commodity prices has provided some support for the domestic currency. But global PMIs have softened in SA’s key trading partners, and for as long as supply chain disruptions and shortages persist the recovery will remain uneven.

Global economic growth concerns have reduced the impetus for commodity price growth 

Economic activity slowed at the outset of the year as major economies navigated the Omicron wave. IHS market reports that consumer service activity contracted in January for the first time in nine months, with the global composite PMI dropping to 51.4 from 54.3.

The risk-averse market mood fed into February as markets priced in extreme interest rate hikes,  causing concerns on economic growth and market volatility. Investors have consequently been bracing for an environment of higher global interest rates and lower economic growth.

The monthly Risk Appetite Index (based on data from about 100 institutional investors) was unchanged from the low recorded in January, with also IHS highlighting that “the past two months represent the first period of risk aversion seen since the survey began in late-2020."

But despite weaker demand in January for copper, steel and aluminium, commodity prices are not expected to collapse in H1.22

Oil prices are expected to fall meaningfully in H2.22

The oil price has been climbing towards US100/bbl on supply shortages and escalating demand, creating severe inflationary concerns, exacerbated by political tensions between Russia and Ukraine.

However, the EIA (the US Energy Information Administration) predicts the price of brent crude oil will dip to US65/bbl by 2023, with variability in the forecasts. Short-term, oil prices are expected to remain elevated, before moderating from the middle of the year as supply improves.

But climate change concerns and the strong psychological shift away from fossil fuels in many nations are not expected to result in oil prices collapsing in the medium-term.

Investors concerned about ESG 

An interesting global survey from POLITICO showed the majority of respondents believed companies, and not consumers, taxpayers, governments, should bear the costs of combatting climate change.

The United Nation’s Intergovernmental Panel on Climate Change collates widespread scientific  research in assessing climate change. The latest report confirms surface temperature will continue to increase until at least the mid-century. “Global warming of 1.5°C … - 2°C will be exceeded … unless deep reductions in CO2 and other greenhouse gas emissions occur in the coming decades.”

While climate change effects so far have been minor, compared to what we can expect in the future, it appears that many people are choosing not to worry until the impact to their lives is more tangible.

Looking at a breakdown of the volume of electricity delivered per province, there was a broad-based decline, barring the North West province and Eastern Cape.

The country‘s electricity supply woes continue to remain a key drag on SA’s GDP potential, with Eskom’s generation business plagued by aging infrastructure, vandalism and a history of poor maintenance.

SMMEs who have been particularly hard hit by the pandemic are vulnerable to electricity supply disruptions at a time when they are trying to claw back profits lost during periods of stringent lockdowns.

The country experienced some reprieve from load shedding over the festive period, however Eskom recently announced the commencement of stage 2 load shedding in order to replenish emergency reserves. Its CEO, Andre de Ruyter recently highlighted “… much still needs to be done for Eskom to achieve operational sustainability and ensure energy security for South Africa”. Extending the operating life of the Koeberg Nuclear Power Station remains a priority.

The utility's  Energy Availability Factor (EAF)  remains well below optimal levels. Going forward,  Eskom “will continue to rely on renewable energy sources to play a significant role to ease the pressure on the national grid.” 

The cash-strapped SOE remains a major drag on the country’s fiscus. The absence of cost-reflective tariffs and the unmanageable debt burden continue to weigh on the utility’s profitability, which is exacerbated by significant overdue municipal debt.

South Africa sees the normal five-year review to its inflation survey take effect from the publication of the January CPI inflation figures later this month (on the 16th), but unlike the previous update in 2017, it is not expected to have a substantial effect.  

Inflation pressures in SA have been on an upwards trend on the consumer side, pushed up by some of the same pressures experienced globally, particularly higher fuel and food prices, with domestic food prices influenced by prevailing global food costs.

However SA’s CPI inflation has not accelerated to the extent of that of the US (latest print 5.9% y/y versus US 7.0% y/y), with the US seeing a high degree of fiscal stimulus which substantially increased consumer spending power, and so demand led inflation pressures.

On the producer side, SA saw PPI inflation climb to 10.8% y/y in December 2021, up substantially from 3.0% y/y in December 2020, driven by high commodity prices, base effects in some subsectors and high transport and equipment costs driving up supply cost pressure.

Globally producer price inflation is generally running at high rates too, reflective of the strong supply side price pressures as global supply chain costs remain elevated, despite recently plateauing at high levels, but unlikely to collapse in the next few months. 

PPI inflation in South Africa of 10.8% y/y in December, is not dissimilar to China’s PPI inflation reading of 10.3% y/y, with domestic inflation impacted by high and rising import costs, not least of all shipping costs.

Low production costs in China helped moderate inflation globally in the 2000s, and keep it anchored in the 2010’s decade, but its rapidly rising producer prices are raising concerns about already high global consumer inflation rates, and how long they will persist.   

Rapid increases in chemicals, rubber and plastic products prices (34.7% higher y/y), along with metals prices (up 23.6% y/y for base and fabricated metals and 40.9% y/y for basic iron and steel) have pushed up PPI inflation in SA, stemming from high commodity prices globally.

Globally inflation is still at a heady pace, and risks seeing a stretched decline through this year as opposed to the quick collapse that was hoped for, but high inflation is not likely to be permanent either, just not as transitory as markets and policy makers initially believed.

Income derived from the tourist accommodation industry grew by a modest 5.5% when measured on a month-on-month seasonally adjusted (mmsa) basis in November, following increases of 42.2% mmsa and 20.3% mmsa in August and September respectively (a rebound from the significant downturn following the July riots and unrest).

Industry occupancy rates climbed slightly in November but remained under 30.0%, markedly below pre-pandemic readings. Indeed, local tourism as well as arrivals from the SADC region have largely sustained the domestic tourism industry, one of the worst affected sectors of the economy.

International tourist arrivals however remain key to many operators in the local market. Pre the discovery of the highly transmissible Omicron variant, the lifting of travel bans by key tourist markets as cases globally waned and lockdown measures were eased saw a 235% year-on-year increase in tourists entering the country in October 2021, according to Stats SA’s latest tourism and migration report. Tourists from international countries (excluding Africa) increased to 59,475 from just 8,325 in October 2020.   

The seasonally significant festive season was however disrupted by the rapid spread of the Omicron variant, which saw many countries reinstate travel bans, leading to a significant loss from cancelled accommodation. However, moderate local lockdown measures saw South Africans flock to popular holiday destinations, buoying the domestic tourism sector. A number of key markets have subsequently dropped travel bans which is positive for SA’s significant tourism market.  

Indeed, global tourism has been one of the most devastated sectors of the economy. “The pace of recovery remains slow and uneven across world regions due to varying degrees of mobility restrictions, vaccination rates and traveller confidence”, according to the UNWTO World Tourism Barometer. 

Moreover, the latest UNWTO (World Trade Organisation) Panel of Experts survey results indicate that while prospects for 2022 have improved, “the majority of experts (64%) now expect international arrivals to return to 2019 levels only in 2024 or later, up from 45% in the September survey”.

December’s CPI inflation print of 5.9% y/y was 0.6% higher than the November's on a month over month basis. Higher transport costs were the primary driver, accelerating 1.9% m/m to outstrip smaller increases in the rental, food and residual components of CPI. 

Looking ahead, food price inflation is expected to climb higher as heavy rains have caused crop damage and delayed planting. Lower yields are thus expected for cops such as sunflower seeds, maize, sorghum, soybeans, other dry beans and peanuts (Grain South Africa producer survey, Agbiz). The current La Nina phenomenon, expected to last until Autumn, causes extreme rainfall, in contract to the dry conditions of Le Nino. 

Transport inflation rose from 15% y/y in November to 16.8% y/y in December, as petrol prices rose by 75c/litre. While there was a 68c/litre cut in January, a huge increase of around R1.30/litre is building for February on the back of a rising global oil price. Brent crude oil price has reached US$87.5/bbl from closer to US$73.5/bbl a month ago.

As the economy recovered ground after the devastating impact of 2020 on businesses and households, many businesses took the opportunity to pass through price increases. Noteworthy price hikes were felt in clothing and footwear, housing and utilities, rent and electricity, restaurants and hotels, personal care and financial services. 

We now expect CPI inflation to average closer to 5.3% y/y for 2022, as the December figure established a higher base for the 2022 CPI figures. 

December’s CPI print will likely give impetus to the SARB’s hawkish tone, following the 25bp repo rate hike November. The SARB targets inflation in a six to twenty-four month period and may now look to deliver a further 25bp hike in January instead of waiting until March. 

The rand has now pierced the R15.50/USD mark. The currency averaged R15.76/USD for the first few days of this quarter, but will likely to average R15.50/USD if not higher for the quarter.

Markets are gaining optimism from the increased certainty of US monetary policy, and the rand is gaining from the still very elevated domestic FRA curve, with about a 2.00% hike in interest rates factored in this year, starting with a 25bp lift at this month’s MPC meeting.  

We expect a 25bp lift in the repo rate this quarter, after the 25bp hike at the last MPC meeting (November 2021). But it's likely that South Africa’s Reserve Bank (SARB) will wait until March to raise rates again, as a rate hike at every meeting would be overly aggressive, even given the current hawkish stance of the MPC.

Indeed, with six meetings a year, the MPC would have to hike in larger increments than 25bp to achieve a 2.00% hike overall in 2022. Such a steep trajectory is unlikely. 

The next FOMC meeting of the US Federal Reserve is on 26th January, six weeks after the last one. We expect quicker QE tapering and also signals of US rate hikes and Fed balance sheet reduction later this year, even as US monetary policy remains broadly accommodative.

December’s US CPI inflation rate, due out today, is expected to rise to 7.0% y/y from 6.8% y/y (5.4% y/y from 4.9% y/y excl. food and energy), pushed up also by commodity prices rising by 5.5% y/y overall in December (Economist commodities price index).

Food and agricultural nonfood prices in particular are up -- 7.8% y/y and 27.6% y/y respectively -- adding to the upwards price pressures for global inflation, but also driven by base effects. 

As base effects reverse from April, we expect US CPI inflation to drop substantially this year, averaging 3.6%. Other data supporting a more dovish stance was the nonfarm payrolls outcome of 199K vs expectations of 450K.

While some are forecasting a US interest rate hike as early as the March FOMC meeting, we foresee a more gradual rise, along the lines of three 25bp hikes, with the first in Q2 2022.

The official unemployment rate rose by 0.5% points in Q3.21 to 34.9% the highest rate since the commencement of the QLFS in 2008, evidencing the dire effects of Covid-19 on South Africa’s already fragile economy pre-pandemic.

Special tabulations done by Stats SA to ascertain “movements between labour market status categories” revealed that “a large number of persons moved from the "employed" and "unemployed" statuses to the "not economically active” categories between the two quarters”. As a consequence of these movements, the labour force participation rate declined by 2.3% points to 55.2% in Q3.21.

Formal sector, non-agricultural employment fell by a notable -5.6% measured on a quarter-on-quarter basis.  Specifically, 571,000 formal sector jobs were shed during the quarter as unrest and looting in parts of the country, coupled with stringent lockdown measures hindered economic activity, weighing on already struggling businesses. While the informal sector of the economy registered a marginal gain of 0.3% q/q, total employment (incl. agriculture and private households) still fell by -4.4% q/q. 

A disaggregation of the data on an industry basis, indicates that the decrease in formal sector (non-agricultural) employment was broad based with seven out of the eight industry categories surveyed reporting declines. The trade sector recorded the largest number of job losses at 272,000 over the quarter, followed by the community and social services sector (226,000).   

The expanded unemployment rate, (which includes individuals who desire employment regardless of whether they are actively seeking work) climbed 2.2% points in Q3.21 to 46.6%, from 44.4% previously and is a marked 17.1 percentage points higher than the rate logged during the same period in 2008, evincing the extent of SA’s growing unemployment crisis.  

The youth category (15-24 years), a priority area of government, which has been particularly affected by the country’s mounting unemployment problem rose further to 66.5% in Q3.21, from 64.4% in Q2.21. Indeed, a focus on improving the quality of and access to education remains essential. Indeed, according to Stats SA of the 7.6 million unemployed persons in Q3.21 “as many as 51,8% had education levels below matric”.

Q4.21 generally sees a seasonal pick-up in employment. However, travel bans put in place by a number of important SA tourist markets, following the discovery of the Omicron variant is likely to dampen the level of economic activity anticipated. Additionally, while SA is currently still on lockdown level one, the President could enforce further lockdown measures in response to a spike in cases.

Headline producer price inflation (PPI) for final manufactured goods climbed to 8.1% y/y in September, from 7.8% y/y in September 2021. The increase, slightly ahead of consensus expectations (Bloomberg) of 8.0% y/y, was underpinned by inflation within the coke, petroleum, chemical, rubber and plastic products grouping, in which fuel price dynamics are captured.

Specifically, inflation within the coke, petroleum, chemical, rubber and plastic products category, which comprises just under 20.0% of the PPI basket, increased to 17.5% y/y in October, from 15.3% y/y in September, and accordingly added 3.4% points to the headline outcome, versus 3.0% points previously.

Moreover, the high oil price, combined with domestic currency weakness, drove up fuel prices in November, which will have a material effect on headline inflation. Petrol and diesel prices increased by R1.21/litre and R1.48c/litre respectively at the beginning of November.  

Manufactured food price inflation eased slightly from September’s reading of 6.7% y/y but remained elevated at 6.5% y/y. The food products, beverages and tobacco products category added a further 2.0% points to the headline reading.

Meat and meat products inflation diminished for the 5th consecutive month (measured on an annual basis) to 6.6% y/y, from 7.9% y/y and 10.7% y/y recorded in September and August respectively, as did producer price inflation within the starches, starch products and animal feeds sub-category and dairy products grouping. Meat prices could, however, experience some upward pressure in the near term.

According to Agbiz, "Cattle and sheep slaughtering activity remains at relatively lower levels compared to 2020." But oil and fats’ prices ticked up to a notable 26.7% y/y in September. South Africa is a net importer of oils and fats and these product prices have remained elevated in the global market.

Inflation within the metals, machinery, equipment and computing equipment segment moderated to 10.1% y/y in October from 10.8% y/y in September, largely on the back of the easing in structural and fabricated metal products prices, but still added 1.4% points (1.5% previously) to the annual headline reading.

Persistent supply chain constraints triggered by the pandemic saw producer price inflation for intermediate manufactured goods continue its upward trajectory in October, reaching a marked 20.4% y/y following readings of 19.5% and 17.7% y/y in September and August respectively.

The result, which was notably stronger than consensus expectations (Bloomberg) of a 0.7% y/y lift, was largely underpinned by robust annual growth from the textiles, clothing, footwear and leather goods category and the pharmaceuticals and medical goods, cosmetics and toiletries grouping.

Specifically, combined they contributed 2.3% points to the top line outcome, on the back of growth of 11.3% y/y and 10.4% y/y respectively.

However, when measured on a quarter on quarter seasonally adjusted basis, the measure used to calculate GDP retail sales fell by -5.4%, dragged down by July’s marked decline, triggered by the riots and unrest in parts of the country in July. Accordingly, it is expected to detract from Q3.21’s GDP reading.  

Consumers have not yet recovered fully from the effects of the pandemic. Indeed, household debt is still elevated, above 66.0% of disposable income, according to data from the SARB while rising administered prices, particularly electricity and fuel costs continue to further dilute limited disposable income. Furthermore, consumer confidence remains subdued especially pertaining to the economic outlook.

According to an online survey conducted by TransUnion between the 10th and 16th of August (the survey included 1,100 adults in South Africa) over 60% of respondents “(i)ndicated their household income was currently negatively impacted due to COVID-19”. Although the survey took place soon after the damaging looting and unrest, which led to job losses, lost earnings and dampened confidence, the proportion of those citing the negative effects of COVID-19 on household income remained largely unchanged from responses collated earlier on in the year. Indeed, a substantial number of consumers remain unable to meet debt obligations. Specifically, according to the survey “forty-one percent reported they’ve been in arrears for a bill or loan in the past three months”. 

Moreover, according to the results of the BankservAfrica Economic Transactions Index (BETI) for September, which “measures economic transactions processed by BankservAfrica via the National Payments System (NPS)” the index logged a quarterly decline of 0.6% in September 2021, the first quarterly BETI decrease since July 2020.

Although conditions have improved from those experienced in the second quarter of last year, retailers continue to face a myriad of challenges. Persistent global supply chain constraints have resulted in longer lead times and stock shortages which have driven up input costs. Moreover, rising administered prices continue to weigh on profits.

The country’s improved vaccination rate accompanied by the easing of stringent lockdown restrictions, however, should benefit retailers during Q4.21 as the holiday season approaches.

Of the 26 million registered voters only 12million voted (46%). Small, localised parties did well at the municipal level, as voters turned to those they trusted in their councils, resulting in a 22% vote for other parties, on over 300 parties/individual candidates.

The growth of ActionSA was rapid, and is seen to provide non radicals an alternative to the EFF, for those who chose to vote. Potentially providing a cross over party, ActionSA could see further rapid growth in 2024’s general election. In this year’s (municipal) elections it gained a cross racial support base. Much will depend however on the ability of the party to gain traction ahead of 2024.

High voter apathy (46% turnout) shows the ANC was particularly afflicted, with survey polls expecting it to get around 56% on a 45% turnout of eligible voters instead of its actual 46%. The vote has been split amongst small parties more than expected and shows the high ability of voters now to identify with a small party’s interests, but with these gaining less than 1% nationally. However, the fall in voter numbers also signifies growing belief that voting does not matter as the vast disillusionment the Zuma Presidency’s years of state capture and corruption has hit deeper than may have been anticipated.

This does not mean Ramaphosa is not trusted overall but instead that individuals are voting for their metros and councils, and not Ramaphosa himself, and this showed in the results. With a massive decline in ANC popularity overall, the party needs to take care not to lose him in its party election next year as likely only he can boost the ANC vote overall in 2024’s general election, which is essentially a presidential election. 

Investors are likely happy with the poll results themselves, but not with a coalition prospect of the ANC and EFF as this would herald a swing towards the extreme left, with the EFF already stating it requires the ANC to join on it on its extreme total land confiscation aims.

Left to extreme left politics are typically anti-business either in a mild form through a high government command of the economy, high degree of regulation (of the private sector) and extreme state intervention in the economy and so of the private sector, or in more extreme destructive forms for economic growth and private sector job creation on the extreme left. Voters have shown they would strongly prefer the opposite.   

The ANC should take note of the voter swing away from left-wing, old style heavily socialist dogma, with most preferring social democracy, as shown by the strong rise in ActionSA and many smaller parties. Delving deeper instead into control, micro-management and regulation of the economy, such as many policies from  the DTI department, will slow economic growth and job creation and will most likely just see further vote slippage for the ANC, as support dwindles nationally towards 40% and below.

The ANC obtaining below 50% is a clear indication of high dissatisfaction from the electorate on the way it has been perceived to conduct itself over the past decade, as voter support has declined over the 2010s decade compared to when the ANC obtained 70% of the vote in 2004. The 2004 outcome was an endorsement of the good policies, strengthening economic growth and declining unemployment engineered under the Mbeki Presidency, from 1999 to 2008 as the private business sector expanded rapidly.

The 2009 general election saw the ANC lose ground on the ousting of Mbeki and incoming President Zuma, with support dropping to 66%, and then to 62% by 2014, and in 2016’s municipal election seeing national support for the ANC decline to 54%, rescued by new President Ramaphosa in 2019 with a rise to 58%.

The mining production update for July also includes June’s outcome, owing to system issues at the Department of Mineral Resources and Energy which prevented them from providing the June data timeously. 

Mining production rose by 19.1% y/y and 10.3% y/y in June and July respectively, following May’s 21.9% y/y climb. Elevated commodity prices and buoyant global demand continued to support mining activity. However, the unrest that took place in Kwa-Zulu Natal and other parts of the country during July, which also affected key transportation routes, led to a number of commodity producers reporting being unable to obtain key inputs required for production (such as gases and explosives).

Annual growth in production in June and July was underpinned primarily by iron ore and PGMs. Specifically in June production of PGMs and iron ore climbed by 59.6% y/y and 34.9% respectively adding a combined 14.1% points to the topline reading. In July production of PGMs decreased substantially but owing to its marked weighting in the index it still added favourably to the headline outcome. Concerns around the impact of the semi-conductor shortages on the global automative sector and thus PGM demand remains. Iron ore production grew by a further 42.9% y/y contributing 3.9% points to July’s result.

A robust rebound in global trade and growth, following the fallout from COVID-19, has led to a sharp increase in industrial demand, with the World Bank’s metals and minerals index up 21% between January and July 2021. However, rates of growth in manufacturing activity have begun to ease. According to the latest JP Morgan Global Manufacturing PMI survey results the “upturn in the global manufacturing sector lost further momentum during August, as rates of output growth decelerated in several major markets”. Supply side constraints remain a key impediment.

Rising Covid-19 cases globally, with the risk of further lockdowns, remains a downside risk to the global growth outcome and SA’s own growth trajectory, which is heavily reliant on exports of commodities. SA’s pace of vaccinations has gained momentum, but the implementation of structural reforms needs to be hastened to improve SA’s competitiveness and attract foreign direct investment.  “Logistics remains one of the main constraints”, for the mining sector and indeed the South African economy and “it is one of the main infrastructural reforms government has committed to undertaking," according to the Minerals Council South Africa.

SA’s ten-year bond yield has dropped to 9.15%, from near 9.34% earlier in August, with the rand reaching R14.39/USD today, supported by improved global financial market sentiment. Foreign appetite for SA bonds deteriorated sharply over August with a -27.7bn net sell-off.

Investor concerns persist on the sustainability of government finances, the once-off boost to revenues from the commodity boom which has already weakened, is not a sustainable financing mechanism to deliver fiscal consolidation, and state expenditure has increased.

SA’s fiscal deficit to date at -R155.9bn (first four months of 2021/22) shows that it may come out lower than the -R482.6bn in the budget (potentially closer to -R460/470bn), but will be substantially larger than the -R209bn of the full 2017/18 year, and the -R231bn of 2018/19.

That is, the state’s finances have not improved that much at all, still worse than the pre-pandemic levels, although 2019/20’s three quarters’ of recession yielding a deficit of -R345bn would be closer to what is likely achieved this 2021/22 year (all main budget figures).

Unsurprisingly, the 5-year yields are still elevated, boosted also by the aggressive pricing in the FRA curve which shows accelerated interest rate hikes and so negatively impacts the shorter end of the yield curve, along with the high maturity load in the period as well. 

While repo rate hikes are unlikely this year, projected debt and deficit ratios lower on GDP revisions, and weekly debt issuance down, there is still no recovery yet in sight for public finances from the harsh impact of COVID-19 lockdowns following on from 2019’s recession.

Domestic holding of debt are high, foreigners disinvested -R109.3bn this year, aware of the lack of material improvement on SA’s fiscal story to levels back to before 2019/20. Deficit projections for 2022/23 and 2023/24 of around -R400bn are still removed from pre 2019.

The flip flop in the state pension et al fund proposal does not obscure the fact that doing away with private pensions risks eradicating a key source of funding for state debt, still necessary given rollovers, if the state delves into the fund to pay for infrastructure expenditure.

Consequently, perceived high country risks remain for SA, and it is unclear whether the Social Development Departments green paper has been wholly withdrawn, partially withdrawn and will resurface with clarifications, or whether in spirit, as markets suspect, it persists.

What is clear is that it has caused market confusion, with expectations that the green paper should not have been published if it was not government policy, as some senior ANC officials have said it is not. Its publication highlights that it certainly is some factions intentions.

This is very negative for markets, due to the policy uncertainty and outright confusion created, with government having said in the past it wishes to reduce policy uncertainty not increase it, and the social development department stating it does not need approval for proposals.

Apparently, the green paper will be reissued and so the damage to business confidence, and policy uncertainty persists in what has already been a weak confidence period with the July riots which are seen to have been sparked by the anti-Ramaphosa pro Zuma/RET faction.

The state pension fund proposal has been viewed as having its origin with the RET faction and so the publication of the green paper doubtless was also from this perspective a further negative for business and investor confidence.

The green paper caused damage to labour relations with government as well, and worried employed South Africans in general given fears of the loss of their pension contributions through corruption and looting, among other malfeasance.

Damage to business confidence damages investment prosects, and so future job creation and GDP growth. If the Social Development Departments paper is not government policy it should not be published if government really is sincere about bolstering business confidence.

The ruling party and allies in the tri-partite alliance need to let go of disincentivising, if not prohibitive policies, including ones to the rapid expansion of its mining sector by private investment, so much to be gained on the fiscal revenue side, as well as jobs.

This is a particular worrying given the waning of the commodity boom and the fact that SA is not seeing an efficient usage of its mineral endowment as state regulations continue to trip up the necessary exploration and development of new mines.

The municipal elections are potentially set for 27th October this year. 

The polls come at a turbulet time for the country, following violent unrest in July and a harsh year and a half of Covid-19, which shows no immediate sign of abating.

Indeed, while the fourth wave of Covid-19 infections in SA was expected to start as early as October this year, the recent sharp about-turn in the previous decline in Covid-19 infections is concerning. With only 10million vaccines administered, and only 11.4% of the eligible poluation fully vaccinated, there is a risk that a municipal election in October could contribute to higher infections and deaths. The IEC has consequently sought to delay elections until February and a final decision is expected by 31st August. 

July’s riots were followed by a lift in infections in KZN in particular, and there is no certainty that September will see a marld drop. October could therefore start off on a relatively high base, with vaccinations likely still well below 30%.

Surveys have shown willingness to delay elections and electioneering in the pandemic, even amongst most members of political parties, despite noises to the contrary by the parties’ leadership. 

Afrobarometer shows a high two thirds of respondents feel elections should be delayed, with the survey taking place May to June (a 2.5% margin of error is noted).

However, trust in political parties and in institutions has diminished since the 2000s of the Mbeki government, which was characterised by strong delivery a drop in unemployment to 21%. Afrobarometer further finds that 67% of South Africans would be willing to forego elections even if a non-elected government could provide substantially better security and services, including housing and jobs -- the sobering result of state capture and corruption, combined with the apparent inability of the current government to address poor service delivery and rampant unemployment.

In May 2021, the capacity utilisation of manufacturing production (the data is collected once every three months) rose to 78.6% of total capacity, from 76.3% in February, and 59.8% in May 2020. However, this reading is still well below the 83.4% average during the Thabo Mbeki period of good governance of SA in the bulk of the 2000s, which saw the fastest sustained period of growth.

The second and third quarters’ of the year typically see improvement in manufacturing utilisation, while the first dips - the month of January sees both a slow return to work and start to production for the year after the festive spend while retailers and wholesalers build up inventory before the holidays, then run it down in the January/February sales. However, South Africa’s third quarter will see substantial damage to its manufacturing capacity from July’s violent riots, and this will have a lengthy effect over 2022 as well, with rebuilding of infrastructure yet to commence generally.

Other countries which have seen severe damage to their economies from riot action have brought in a wide range of fiscal measures, including tax exemptions in distressed sectors, VAT exemptions on construction goods and services to assist in rebuilding infrastructure, VAT rebates to reduce food poverty, job creation initiatives, grants and cash transfers to afflicted small businesses and the poor.

Gauteng’s economic recovery plan includes some focus on these as well as identifying the need to bolster business confidence and funding for re-building, allocating R100million to rebuilding township development, including township industrialisation, special economic zones as well as backyard shack upgrades to create thousands of commercial and residential units in townships.

Up to a billion rand of blended finance is eventually envisioned to be matched rand for rand by private sector contributors and include 50% grant/50% loans for businesses in distress from the riots.

South Africa's total tax collections rose by a marked 87.8% y/y in June, partly on statistical base factors as the economy recovers from last year's Covid-induced contraction. Personal income tax receipts grew by 23.8% y/y as people returned to their jobs following the stringent lockdowns. According to BankservAfrica data, aggregate take-home pay for all employees was up by 11% year-on-year. However, levels are still below those logged pre-pandemic with unemployment sitting at an elevated 32.6%.

Corporate tax receipts increased significantly on a year-on-year basis and by a notable 69.1% m/m, as June is an important month for provisional tax payments. However, businesses in certain sectors of the economy have been heavily affected by the pandemic, especially those in the tourism and hospitality related industries. According to Stats SA data, a further 217 businesses within the trade, catering and accommodation sector were placed into liquidation between January and June 2021.     

Excise tax revenue has been severely constrained by the numerous alcohol bans instituted by government to free up beds in hospitals (usually occupied by alcohol related accidents) when Covid-19 infection rates spike. The latest ban (which has been subsequently lifted) will see excise tax revenue from this source dwindle in July. 

On the expenditure side, debt service costs increased by 18.9% on a year-on-year basis and continue to crowd out social and investment spending.

As a result of the extended, stringent lockdown restrictions to curb the third wave and the significant economic consequences of the looting and unrest in parts of the country earlier this month, Treasury has committed additional relief funding, which according to Treasury will be covered largely by improved revenue receipts. However, that additional revenue could have helped hasten the path of fiscal consolidation and reduced some of the pressure on the severely constrained fiscus. Additionally, we have lowered our growth forecast for the year to 3.9% y/y from 4.5% y/y previously as a result of the unrest. A lower nominal GDP outcome for 2021 would accordingly have a dampening effect on currently projected 2021/22 fiscal metrics, a concern for ratings agencies.

This decline in July reflects the effects of the tightening of domestic restrictions as well as of the protest action in Kwa-Zulu Natal (KZN) and parts of the Gauteng province. The Covid-19 linked restrictions will have hampered production linked to the alcohol and hospitality sectors in particular. The protest action resulted in the closure of some manufacturing plants. This, coupled with interruptions to transport, resulted in supply difficulties that will have affected production at a range of other manufacturers.

According to the survey “the manufacturing sector may also have been negatively impacted by the recent cyber-attack on Transnet, which saw operations at SA’s major ports temporarily grind to a halt."

August should see a meaningful recovery in production and demand as the domestic situation has stabilised and the government eased lockdown restrictions. Indeed, the business expectations sub-index lifted in July on improving expectations of business conditions in six-months’ time.

The violence earlier this month will likely cost South Africa's GDP about R49bn in real terms. But this blow will likely be softened by global macro-economic factors, including commodity prices and the pace of Covid recovery, that are working in the country's favour. Increased tax revenue receipts as a result of these factors will help to fund relief efforts that are desperately needed in the wake of the carnage.

The second quarter saw significant growth in commodity prices, which benefited both exports and tax revenues. Commodity prices were up 14.8% q/q overall (as per the Economist Commodities price index), bouyed by a substantial 19.2% lift in metals prices. Both of these upticks exceeded the respective increases of 14.7% q/q and 15.4% q/q in Q1.21. 

Revenue collections for Q2.21 to date are up on estimates, with SARS stating today that tax revenue collections were very strong in the first (fiscal) quarter, exceeding those of the prior two fiscal year’s first quarters. The revenue boon came from a number of sources, including VAT and the mining sector.

Additionally, corporate tax revenue from the financial sector was higher than expected, while SARS has also had a better than anticipated performance in revenue recovery (well above that estimated) from compliance activities, also boosting the overall outcome. 

SARS added that this greater than expected revenue collection, compared to that budgeted for in February 2021, is expected to adequately cover the cost of a number of measures announced today to provide R36.2bn in fiscal assistance to lessen the impact of the riots and looting.

In particular, the R350 social relief of distress grant is extended until end March 2022, which will cost R27bn, while the cost to Sasria from the riots damage is estimated at R15bn to R20bn (the Sasria balance sheet has R9.7bn, while R6.5bn is to come from reinsurance).

The police will be allocated an additional R250m, SANDF R750m. National Treasury highlights there will be no additional borrowing to fund this fiscal package (allaying rating concerns), with reprioritisations and revenue collections better than expected in February.

However, prior to the riots a better than expected economic outcome for 2021 of 4.5% was likely, and government’s fiscal position was expected to improve by R50bn to R100bn on the strong tax ensuing from the robust growth environment and strong commodity price effect .

With the damage to the economy and tax base from the violent riots, and consolidating commodity prices, the revenue collection overrun is now likely to be closer to R50bn, while the fiscal package announced today will not fully cover the losses faced by businesses.

Retail trade sales rose by 15.8% y/y in May, ahead of consensus expectations of 12.3% y/y (Bloomberg). The lift was largely underpinned by base effects following May 2020’s -11.9% y/y decline when lockdown restrictions were heightened, albeit less severe than April 2020.        

Measured on a month-on-month seasonally adjusted (mmsa) basis retail trade sales increased by 2.1%, following contractions of -0.6% and -4.4% mmsa in April and March, respectively.     

According to the BER’s retail trade survey for Q2.21 which reports on consumer expectations and activity, confidence amongst retailers climbed markedly in Q2.21, to a six year high, on “improved sales volumes and strengthened pricing power” leading to higher profitability. Specifically, retailers selling semi-durable and durable goods benefitted from expenditure by higher income segments of the market, who used accumulated savings (not used on leisure and transport during lockdown) to improve their work-from-home experience. The survey was however conducted between the 12 and 31 May, before lockdown restrictions were tightened.

Lockdown restrictions, in response to spikes in infection rates and the subsequent loosening of measures when cases recede, have a direct impact on consumption patterns as evinced by BankservAfrica’s Economic Transaction Index (BETI), which tracks the volume and value of South Africa’s electronic payments interbank transactions routed through BankservAfrica. Specifically, the index which exhibited significant declines in Q2.20 when the most severe constraints were in place gradually improved in line with the easing of lockdown restrictions.

The BETI for May indicates that the number of “actual transactions was 108.2 million, an improvement of 17.2% on a year ago”. Moreover, the total number of estimated monthly payments have risen by 13.1% between May 2021 and May 2020, as a number of workers have returned to their jobs over the year.

While the marked recovery in the salary base is positive for HCE, uncertainty around the current situation playing out in the country will weigh heavily on confidence, hindering the growth trajectory. 

Specifically, production fell by -21.7% y/y in May 2020 when restrictions on production (although to a notably lesser degree than April 2020) were still in place and global growth concerns were heightened. May’s outcome was below consensus expectations of 31.5% y/y (Bloomberg).

The lift in production was largely broad based, with all minerals and mineral groups except coal and nickel experiencing some level of growth. The largest positive contributors were PGMs, iron ore and gold. The production of PGMs rose by a further 27% y/y in May, adding 6.1% points to the top line reading, on a robust recovery in the automative market. 

Similarly, iron ore output increased by 48.4% y/y, adding a further 4.0% points, assisted by the rebound in global trade and growth following the fallout from Covid-19, which has led in turn to a sharp increase in industrial demand. Constrained seaborne supply has also aided the iron ore market, with prices up over 26.0% since January 2021.

Base metals in general are up notably, boosted by the pick-up in global manufacturing activity and new order growth. This is evidenced by the results of JP Morgan’s latest global PMI manufacturing survey for June which indicates that “global manufacturing remained in a strong growth phase in June, with output, new orders and employment all rising and business optimism at robust levels”, according to Markit.

SA’s mining sector, a key commodity exporter continues to benefit from the strong rise in demand for commodities as global growth rebounds and has played a key role in SA’s growth momentum as some other sectors of the economy continue to flounder. Notwithstanding this, the domestic mining sector continues to face numerous challenges hindering its ability to take full advantage of the current surge in demand.  Key amongst these are electricity supply limitations, although announcements pertaining to increased generation are positive for the energy intensive sector. Furthermore, logistical constraints, especially rail and port issues continue to impede activity and export potential.  

Further stringent lockdown restrictions (although not our expected case) coupled with the civil unrest currently playing out in the country remain downside risks to the country’s growth trajectory.

Aggregate new vehicle sales rose by 6,387 units or 20.2% y/y in June. The reading, while positive, is largely buoyed by statistical base factors. Specifically, new vehicle sales plummeted by around -31.0% y/y in June 2020, when restrictions were placed on economic activity. When measured on a month-on-month basis, however, sales fell by -0.8% in June.

New passenger car sales, which make up over 60% of total sales, grew by 28% y/y in June and by a modest 1.7% m/m. While the economy is recovering from lows experienced in Q2.20, with Q1.21’s GDP reading higher than anticipated, many consumers still remain financially constrained. Consumer confidence is subdued, having faltered in Q2.21, with respondents in the FNB/BER consumer confidence survey less confident about the economic outlook as the third wave takes hold. Additionally, fewer respondents deem it an appropriate time to purchase big ticket, non-durable items (like vehicles).   

The light commercial vehicle category (incl. bakkies and mini-buses) which makes up a further 30% of domestic sales rose by 9.6% when compared to June 2020, but declined, albeit marginally on a m/m basis. Small and medium sized businesses have been particularly hard hit by the pandemic, with a number having shut their doors permanently.  Medim commercial vehicle sales are up moderately m/m, however the heavy commercial category (which includes extra-heavy and buses) is down -7.0% m/m. A rebound in fixed investment should support growth in these categories.    

Moreover, export sales, which are crucial to South Africa’s automotive sector, are up 65.8% y/y year-to-date. The pick-up in global growth, which is forecast to grow by 6.0% this year, according to the IMF should continue to support SA’s export market.

Supported by a 1.5% m/m lift in exports, SA's May trade surplus beat Bloomberg consensus expectations of a R49.6bn. Exports totalled R163.51bn, outpacing imports of R108.91bn (-0.9% m/m) .

A review of the trade highlights released by SARS suggests that the modest monthly pick-up in exports was buoyed by vegetable products as well as a recovery in global demand for vehicles and transport equipment. While some key import categories grew over the period, there was a notable decline in precious metals and stones.     

May’s favourable reading is consistent with the results of JP Morgan’s global manufacturing PMI survey, which revealed that “new order growth accelerated to an 11-year high” in May. This despite persistent supply side constraints and accelerating input costs. Furthermore, the outlook for the sector remains favourable, “with manufacturers forecasting further increases in output over the next 12 months." 

Indeed, global growth is forecast to rise by 6.0% this year, according to the IMF, supported in part by widespread vaccination drives and extensive fiscal support measures in advanced economies. Robust commodity prices and increasing global demand should continue to buoy export growth

However, while imports have been propped up by the rand and US dollar-denominated oil price, domestic consumption and investment activity remain relatively subdued. Furthermore, according to results from the May ABSA purchasing managers index, domestic purchasing managers “turned slightly less optimistic about the trading environment going forward." This is possibly driven by heightened concerns over the third wave. A rapid, efficient vaccination rollout is imperative to boost confidence and place SA on a sustainable growth path.

The surplus on the merchandise trade account widened moderately to R54.6bn in May, from R51.25bn (revised) in April. The outcome was notably above Bloomberg consensus expectations of a R49.6bn surplus, supported by a 1.5% m/m lift in exports to R163.51bn, which outpaced imports of R108.91bn   (-0.9%m/m) .

A review of the trade highlights released by SARS, suggests that the modest monthly pick-up in exports was largely buoyed by vegetable products and vehicles and transport equipment as global auto demand continues to recover. On the import side, while some categories of key imports grew over the period, a notable decline in precious metals and stones largely drove the contraction on the import side.     

May’s favourable reading is supported by the results from JP Morgan’s global manufacturing PMI survey, which revealed that “new order growth accelerated to an 11-year high” in May. This despite persistent supply side constraints and accelerating input costs. Furthermore, the outlook for the sector remains favourable, “with manufacturers forecasting further increases in output over the next 12 months”.   

Indeed, global growth is forecast to rise by 6.0% this year, according to the IMF supported in part by the widespread vaccination drive and extensive fiscal support measures in advanced economies. Robust commodity prices and increasing global demand should continue to buoy export growth

However, while imports have been propped up by the rand and US dollar denominated oil price, domestic consumption and investment activity remain relatively subdued. Moreover, according to results from the May ABSA purchasing managers index, domestic purchasing managers “turned slightly less optimistic about the trading environment going forward”, according to the BER. Heightened concerns over the third wave could be driving this. A rapid, efficient vaccination rollout is imperative to boost confidence and place SA on a sustainable growth path.

Commodity prices essentially retained their levels overall in June. On a disaggregated basis, however, some weakness in industrials and metals was counteracted by slightly higher agricultural food prices, with the result that commidities overall consolidated following a heady run that has lasted almost twelve months.

Commodity prices reached ten-year highs this year, very close to the 2011 peak of the 2000s commodity boom. This earlier commodity super cycle was driven by both accelerating demand from the rapidly growing emerging market economies (particularly the BRIC nations) and supply side constrains in the face of protracted growth in demand.

The Economist commodities price index shows a rise in 2000 from close to 60 index points to 189.7 in 2011. By comparison, the the index since April rose from 100.7 to 188.8. While currently not a super cycle, the acceleration since last year has been rapid.

Year on year, the index shows commodity prices are currently up 76% overall, while metals prices are up 93% y/y and industrials are 78% higher than a year ago. Non-food agricultural prices are 81% higher y/y.

Food commodity prices are only up a relatively modest 41% y/y, but it's a strong showing for a category which experienced deflation in many periods since 2011, driven higher over the last twelve months by growing global demand, along with the other commodities.

Indeed, the global PMI reached a fifteen year high in May, with demand for new orders and production output at the fastest pace since 2006, led by the US, the Euro area and the UK (as measured by the J.P. Morgan Global Composite Output Index).

International trade has strengthened materially, with new export business at a peak in the global composite J.P. Morgan PMI’s series, evidencing strong demand pressures persist, although supply shortages remain, and that price inflation is at its quickest pace since 2008.

With the FOMC meeting tomorrow evening, SA time, market expectations are for the Fed to potentially provide some deeper insight on its inflation views, which could feed market concerns on the timing of future QE tapering, although the Fed is likely to be judicious in this.

Manufacturing production climbed by an unprecedented 87.9% y/y in April, following March’s 5.2% y/y (revised) lift, on the low statistical base effect produced in April 2020, triggered by Covid-19 related restrictions.

Specifically, manufacturing production plummeted by -48.7% y/y in April 2020 when rigorous level 5 measures were imposed to curb the infection rate, leading to a widespread halt in economic activity, except for those companies involved in the production and provision of essential goods and services.  

Seasonal factors, with numerous public holidays falling within the month of April likely, largely underpinned the month-on-month decline in output.  However, on a quarter on quarter seasonally adjusted basis (qqsa), which is the measure used to calculate GDP, manufacturing output was still up by 0.9%.

A disaggregation of the manufacturing data indicates that the food and beverage sector, as well as the motor vehicle and parts category, were primarily responsible for the quarter-on-quarter seasonally adjusted lift. Combined they added 2.0% points, on the back of growth of 3.4% qqsa and 11.1% qqsa respectively. Conversely petroleum and chemical products' output fell by -4.0% qqsa and based on its significant weighting in the manufacturing basket, detracted -0.8% points from the outcome.

Advance indications provided by the Absa PMI manufacturing survey for May indicate that business activity picked up again in May, boosted by new sales orders, recovering April’s losses. However, worryingly prospects with respect to future business conditions declined, despite circumstances improving. Concerns around a “renewed virus-induced change in spending behaviour by consumers and firms” hindering demand as the third wave builds, was cited as a probable explanation by the BER. Additionally, rotational load shedding continues to cloud sentiment.

Eskom’s Energy Availability Factor which shows the utility’s available output to the grid for consumption versus its total potential capacity has been below 70% since Q3.20, with Q2.21 showing plant performance at an EAF of closer to 64% (data to early June). Indeed, unreliable electricity supply remains one of the biggest downside risks to economic growth domestically.

April's significant y/y increase in electricity demand and supply comes off a low base. In April of last year, generation and distribution of electricity plunged by -22.8% y/y and -23.3% y/y respectively as economic actvity contracted under the harsh lockdown imposed in late March. Measured on a month-on-month basis, April 2021 production was down -1.8%, while consumption slid by -2.4%.

The Energy Availability Factor (EAF) -- the percentage of SA's total theoretical generation capacity available to the grid -- did improve somewhat in May and June of last year, but has been below the 70% mark since the start of Q3.20 and is averaging just 60.90% year-to-date. Electricity shortages are expected to continue, with Eskom’s CEO reiterating at March’s State of the System briefing that, “there will continue to be an electricity supply shortfall of approximately 4,000MW over the next five years.” The high demand winter period will see further supply disruptions, according to Eskom. The latest bout of load shedding is a case in point, caused by the depletion of emergency generation reserves and breakdowns at several generation units.

Unreliable electricity supply remains one of the biggest downside risks to domestic economic growth. It continues to hinder businesses (especially smaller players), already struggling to stay afloat after the devastating financial effects of the pandemic.

The cash-strapped power utility did reduce its debt burden by R83bn in the 2020/2021 financial year, “due to the repayment of the maturing debt and changes in the exchange rate,” according to Minister Pravin Gordhan. However, Eskom’s R410bn debt continues to be a huge strain on the country’s fiscus and a key concern for credit rating agencies.

The seasonally adjusted (SA) headline Purchasing Managers’ index (PMI) increased by 1.6% points to 57.8 in May 2021. Four of the five sub-indices remained above the neutral 50-point mark, barring the employment index which fell back into negative territory. Q2.21’s performance thus far, which is 3.2 points up on Q4.20’s outcome, “suggests that the sector is on track to record another quarterly expansion”.   

Business activity recovered its April losses, rising by 8 points to 58.8 in May 2021, largely on the back of a notable pick up in new sales orders. Specifically, the new sales index climbed to 60.5 from 58.7 recorded in April, likely buoyed by domestic demand as survey respondents reported a decline in export activity. Despite the pick-up in business activity the employment index fell back into negative territory with a reading of 49.6. Joblessness continues to aggravate the financial pressure many households are already experiencing, against a muted economic background. Indeed, the official unemployment rate reached 32.6% in Q1.21.

Manufacturing cost pressures as measured by the purchasing price index declined slightly in May, but remained elevated at 87.1, markedly above last year’s average of 73 points. Specifically, the “recent high readings of the price index correspond to the official producer price index (PPI) data published by Stats SA,” which saw annual PPI for final manufactured goods climb to 6.7% y/y in April, from 5.2% y/y previously.

Prospects with respect to future business conditions declined in May, despite circumstances improving, with the index tracking expected business conditions in six months’ time falling from 67.9 in April to 63.5 in May. Concerns around a “renewed virus-induced change in spending behaviour by consumers and firms” hindering demand as the third wave builds, was cited as a probable explanation by the BER. Additionally, rotational load shedding continues to cloud sentiment.

A buoyant tourism sector is essential to South Africa's economic recovery. While the easing of restrictions on domestic travel has been a lifeline for many in the industry, the dearth of international tourists continues to weigh heavily.

The number of travellers (both South African residents and foreign travellers) passing through SA’s ports of entry/exit in March declined by a substantial -73.5% when compared to the same period last year. However, when measured on a month-on-month basis, numbers rose by 64.8%, likely aided by the move back to level 1 at the beginning of March.

Specifically, the number of foreign tourists fell by a marked -70.5% y/y in March, following February’s -88.7% y/y decline. The vast majority, over 85% or 136 506 of foreign overnight visitors travelled from the SADC regions, with the largest number coming from Mozambique, Zimbabwe and Lesotho, with road transport the dominant means of travel.  

Travel from the rest of the world (excl. Africa) continues to be limited, with most commercial passenger flights to and from South Africa still suspended. Indeed, domestic, leisure travel has largely helped keep SA’s tourism industry afloat, although a number of businesses have succumbed to the financial effects of the pandemic. 

Income from accommodation eased to -35.9% y/y in March 2021, from -74.1% y/y in February. The drop was underpinned by a -16.5% y/y decline in the number of stay unit nights sold, coupled with -23.2% y/y slide in the average income per stay unit. The Hotels category, which nakes up 60% of the reading, was down -39.7% y/y, with occupancy rates still at a depressed level of 23.5% in March, according to Stats SA. 

The monthly lift of 44.0% is positive, although down on December’s result, which was boosted by pent-up demand during the festive season. 

As the third wave persists, further, tighter lockdown restrictions remain a risk to the pace of recovery, although we do not foresee the country moving back to the harsh levels experienced in Q2.20. The second phase of the vaccine rollout is gaining momentum but SA is still in the early stages and far behind many other nations. 

The surplus on South Africa's merchandise trade account increased markedly to R52.77bn in March, from R31.22bn (revised) in February. The outcome was well above Bloomberg consensus expectations of a R23.6bn surplus and was underpinned by a 28.9% m/m increase in exports to R168.29bn, ahead of the 16.3% m/m lift in imports to R115.52bn.

March’s outcome is supported by results from the JP Morgan global manufacturing PMI for March which indicated that international trade flows “(p)icked up pace, with growth of new export business the steepest since January 2018”.

Measured on an annual basis, March’s R52.77bn surplus is a notable improvement from the R21.41bn trade balance surplus logged last year.

A review of the trade highlights released by SARS, suggests that the lift in exports was broad based, with all key categories increasing on a month-on-month basis. Notably Precious metals and stones exports grew by 41.0% m/m. Similarly, all major import segments rose, when compared to the previous month.  

Estimates by the World Trade Organisation (WTO), suggest that the volume of world merchandise trade could grow by “8.0% in 2021 after having fallen 5.3% in 2020” and thereafter decelerate to 4.0%. However, they do caution that the “relatively positive short-term outlook for global trade is marred by regional disparities, continued weakness in services trade, and lagging vaccination timetables, particularly in poor countries”.