Anchor’s Coffee Table Economics note by Casey Delport will be distributed intermittently and is a collection of Casey’s opinions on key economic factors and events shaping markets globally and in South Africa (SA). It is essentially Casey’s thoughts and perspectives on the multiple dynamics at play in the global and local economy.
Executive summary
In this week’s edition, we highlight the following:
- Dimming dawn: Moody’s negative credit outlook casts a shadow on China’s credit horizon: In another blow to China’s beleaguered economy, the credit ratings agency Moody’s downgraded its outlook on China’s government credit rating from stable to negative. Whilst nothing about China is ever particularly simple, a negative credit rating outlook for China is significant due to its global economic integration, the unique characteristics of its state-controlled economy, and the potential political and financial implications associated with the communist political regime.
- The proverbial chickens came to roost with the release of SA’s latest GDP print: Despite a relatively robust and resilient 1Q23 and 2Q23, the South African (SA) economy contracted by 0.2% QoQ seasonally adjusted (sa) in 3Q23. Unsurprisingly, key issues such as the enduring financial strain on households and the continued supply-related obstacles caused by disruptions in rail and inefficiencies at our ports are starting to meaningfully weigh on the local economy.
- Gloomy consumer sentiment heading into the festive season: Having bounced back from -25 index points in 2Q23 to -16 in 3Q23, the FNB/BER Consumer Confidence Index (CCI) experienced a slight dip to -17 index points in 4Q23. While consumer sentiment remained higher compared to the very low levels observed in 1H23, the latest reading of -17 marks the lowest festive-season consumer confidence level in over two decades.
Dimming dawn: Moody’s negative credit outlook casts a shadow on China’s credit horizon
In another blow to China’s beleaguered economy, the credit ratings agency Moody’s downgraded its outlook on China’s government credit rating from stable to negative. While retaining the “A1” long-term rating on China’s sovereign bonds, Moody’s anticipates a slowdown in the country’s annual GDP growth to 4% in 2024 and 2025, averaging 3.8% from 2026 to 2030. Structural factors, including weak demographics, are expected to contribute to a further decline to 3.5% by 2030. The downgrade essentially reflects concerns over rising debt levels, the impact on overall economic growth, and the government’s fiscal stimulus measures to address the debt crisis among property developers. Moreover, Moody’s expressed concern at the potential cost to the national government of bailing out debt-burdened regional and local governments and state-owned businesses.
Unsurprisingly, China’s Finance Ministry expressed disappointment with Moody’s decision, highlighting the nation’s economic recovery amid global challenges. However, as pointed out by Moody’s, one cannot ignore the heightened risks associated with a decline in the country’s medium-term economic growth, continued contraction in the property sector, and difficulties in formulating policies that promote economic rebalancing without fostering moral hazard. Following this announcement, China’s credit default swaps, which reflect the expense of protecting against a government default, experienced an increase. Moody’s assessment specifically referenced recent fiscal actions by the central government, such as borrowing for reconstruction and uncommon mid-year fiscal adjustments.
Overall, lowering the credit outlook marks an important (albeit an unwelcome) milestone for China’s economy. Until recently, China had seemingly unlimited money to spend on massive infrastructure projects (both locally and abroad), backed by an unstoppable growth rate. Now, the country is plagued by a series of crises, and Chinese authorities are facing growing anxiety about the future. It is worth pointing out that, whilst borrowing by China’s national government has been limited, local and regional governments and state-owned enterprises (SOEs) have borrowed heavily for the past 15 years.
The money the local governments pulled in from lenders has generated high economic growth, but many of them are now in serious trouble. Nonetheless, from a more straightforward viewpoint, the change in the credit outlook will have little direct effect on China’s immediate national finances. Unlike many other countries, China relies very little on overseas borrowing to float its national accounts. The national government mainly sells bonds to the country’s state-owned banks, and China’s regional and local governments and SOEs also sell bonds to them in turn.
The bottom line
Whilst nothing about China is ever particularly simple, a negative credit rating outlook for China is significant due to its global economic integration, the unique characteristics of its state-controlled economy, and the potential political and financial implications associated with the communist political regime. It underscores the importance of managing economic challenges effectively to maintain stability and confidence in domestic and international markets.
The chickens come home to roost: SA 3Q23 GDP print reflects the reality of loadshedding and logistical dysfunction
The proverbial chickens came to roost with the release of SA’s latest GDP print – despite a relatively robust and resilient 1Q23 and 2Q23, the SA economy contracted by 0.2% QoQ (sa) in 3Q23. Unsurprisingly, key issues such as the enduring financial strain on households and the continued supply-related obstacles caused by disruptions in rail and inefficiencies at our ports are beginning to meaningfully weigh on the economy. In comparison to the corresponding period in the previous year, there was a contraction of 0.7% in the economy, with the cumulative growth for the initial nine months of this year remaining modest at 0.3%.
Breaking down the data to the sectoral level, five of the ten sectors were down in 3Q23. On the production side, the agricultural sector was the biggest drag on GDP growth, as the gross value added in the sector shrunk by 9.6% QoQ sa. The agricultural industry notably faced several headwinds in 3Q23, including the outbreak of avian flu and the floods in the Western Cape. Large quarterly swings in the agricultural sector are not unusual and can have noticeable effects on overall GDP growth despite the sector accounting for just c. 2% of GDP. If one excludes the sector from headline GDP, growth was roughly zero in 3Q23. Resilience in some of the largest services sectors offset weakness in primary and secondary sectors. With respect to the expenditure-side GDP subcomponents, there was evident weakness in underlying domestic demand – household consumption and fixed investment contracted on a quarterly basis, while government consumption growth slowed. Notably, investment spending in machinery and equipment decreased slightly from 2Q23. However, the level was still c. 12% stronger than a year ago, likely reflecting businesses’ ongoing investment spending on alternative energy sources.
Household consumption expenditure continued its downward trend, declining by 0.3% QoQ, following a revised decrease of 0.2% in the preceding quarter. Despite some improvement in the labour market, as indicated by the Quarterly Labour Force Survey (QLFS), households grappled with escalating financial pressures due to increasing interest rates and heightened inflation. The only positive aspect of consumption was the spending on semi-durable goods, including clothing, footwear, and consumer electronics. However, this was outweighed by a significant contraction in expenditure on durable goods, which are more sensitive to changes in interest rates and non-durables like food and beverages, facing persistent high inflation.
Services also experienced a contraction, which indicates that households are sacrificing discretionary spending to meet their essential needs. Whilst the external sector positively contributed to growth, it was only due to imports falling more than exports. Exports grew by a meagre 0.6% QoQ, the same rate as in 2Q23 – reflecting the continued challenges stemming from logistical constraints despite a weak rand and the lower-than-expected frequency of power cuts. Imports, however, dropped sharply as the surge in energy-related investments faded, and household spending declined.
The bottom line
Looking ahead, we expect growth to remain subdued. Consumer spending growth will likely remain under pressure amid muted wage growth and the persistence of elevated interest rates. The existing bottlenecks at the country’s ports are expected to exert further pressure on both short-term growth and overall sentiment. Moreover, there are indications that the escalating issues at the ports are beginning to impact real economic activity, posing concerns for both near-term growth and general sentiment across the board. The proverbial economic chickens are indeed coming home to roost.
Gloomy consumer sentiment heading into the festive season
Having bounced back from -25 index points in 2Q23 to -16 in 3Q23, the FNB/BER CCI recorded a slight dip to -17 index points in 4Q23. While consumer sentiment remained higher compared to the very low levels observed in 1H23, the latest reading of -17 marks the lowest festive-season consumer confidence level in over two decades. Remarkably, it falls even below the -12 recorded during the COVID-19-impacted 4Q20. This suggests that local consumers are likely to exercise caution in their holiday spending, which would particularly impact retailers of high-end luxury goods.
Consumer confidence surveys such as the FNB/BER CCI provide regular assessments of consumer attitudes and expectations and are used to evaluate economic trends and prospects. The surveys are designed to explore why changes in consumer expectations occur and how these changes influence consumer spending and saving decisions. The FNB/BER CCI, in particular, combines the results of three questions posed to SA adults, namely the expected performance of the economy, the expected financial position of households and the rating of the appropriateness of the present time to buy durable goods, such as furniture, appliances, and electronic equipment. As such, consumer confidence is expressed as a net balance. The net balance is derived as the percentage of respondents expecting an improvement/good time to buy durable goods, less the percentage expecting a deterioration/bad time to buy durable goods.
A low level of confidence naturally indicates that consumers are concerned about the future (such as concerns around job security, pay raises, bonuses, etc.) In a mindset characterised by caution, consumers typically trim expenditures to essentials such as food and services, reallocating income toward debt repayment. Conversely, during periods of high confidence, consumers are inclined to take on debt (or reduce savings) and boost spending on non-essential items such as furniture, household appliances, vehicles, clothing, and footwear. Credit often plays a role in financing these discretionary purchases. When confidence wanes, spending on such items decreases, as households can usually postpone these acquisitions without an immediate impact on their living conditions. While an increase in consumer confidence naturally signals a greater willingness to spend, this eagerness only translates into actual sales if consumers’ spending capacity improves. This capacity hinges on factors like their inflation-adjusted after-tax income and the accessibility of credit. A surge in consumer confidence may lead to a rise in overall household consumption spending, particularly in the retail and motor vehicle sectors. Conversely, a decline in consumer confidence tends to have the opposite effect.
The bottom line
The low festive-season consumer confidence reading shows that the average SA consumer is heading into the festive season with a somewhat sombre, gloomy outlook. As a result, sales of big-ticket discretionary goods, especially interest-rate sensitive goods, will likely underperform relative to previous holiday shopping periods. However, the fact that the low CCI reading largely stems from consumers’ very negative perceptions about the outlook for the national economy (and to a lesser extent from pressure on their household finances) offers some hope that the all-important Christmas gift-giving period will not be a complete whitewash for retailers. Essentials, value-for-money products, and affordable luxuries will likely be at the top of consumers’ holiday shopping lists.
