Anchor’s Coffee Table Economics note by Casey Sprake will be distributed intermittently. It 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 economies.
Executive summary
In this week’s edition, we highlight the following:
- Top of the pops – emerging markets (EMs) hitting new investment highs: In the increasingly dynamic landscape of global economics, EMs stand apart by offering opportunities for investment and economic development. At the heart of this economic dynamism lies foreign direct investment (FDI), a catalyst that not only fuels growth but also has the potential to ignite transformation.
- Merry March – SA inflation cools for the first time this year: In a more positive turn of events for South African consumers (following two consecutive monthly increases), headline inflation softened to 5.3% in March from 5.6% in February. Looking ahead, we expect inflation to remain subdued, albeit at levels higher than initially envisioned at the very start of the year. Core inflation (particularly that of goods) will likely remain subdued as consumer demand continues to be constrained by the pressures of elevated interest rates. Risks to the outlook appear more entrenched on the supply side – particularly with regard to electricity, fuel, and other administered prices.
- SA consumers continue to battle the post-festive season blues: The latest decline in retail sales reflects the financial constraints most local consumers face, further compounded by the typical post-festive season burden of elevated spending. With retail sector performance showing disappointing results in the first two months of this year, overall activity is now averaging a 1.8% YoY rise – lower than the data recorded in 4Q23. Factors such as high interest rates, sluggish disinflation, and concerns about economic activity, job security, and political stability are likely contributing to the subdued consumer demand.
Top of the pops – EMs hitting new investment highs
In the increasingly dynamic landscape of global economics, EMs stand apart by offering opportunities for investment and economic development. At the heart of this economic dynamism lies FDI, a catalyst that fuels growth and has the potential to ignite transformation. FDI essentially refers to investment made by a company or an individual in one country in another country’s business interests, typically through business operations or by acquiring business assets in a foreign country.
FDI is crucial for global economic development for several reasons. First and foremost, FDI brings in capital from foreign sources, which can be used for various purposes such as infrastructure development, technological advancement, and job creation. This capital injection can stimulate economic growth and development in the receiving country. Multinational corporations often bring advanced technology, management practices, and skills to the countries where they invest. This technology transfer can enhance the productivity and competitiveness of local industries, contributing to economic development and industrialisation. Furthermore, FDI can facilitate trade between countries by establishing production facilities or distribution networks in foreign markets. This can increase exports and imports, leading to economic integration and growth. FDI projects often require investments in infrastructure such as roads, ports, and telecommunications. These infrastructure developments benefit the FDI projects and the overall economy by improving connectivity, reducing transaction costs, and facilitating trade.
EMs, in particular, often lack sufficient domestic capital to fund their development needs. FDI provides a vital source of external capital that can be used to finance infrastructure projects, technological upgrades, and industrial expansion. As such, FDI projects often create employment opportunities in EMs, especially in sectors such as manufacturing, services, and technology. This job creation helps to reduce unemployment, alleviate poverty, and improve living standards. Additionally, employees working in FDI projects may acquire new skills and expertise, which can contribute to human capital development.
Furthermore, FDI can facilitate market access for EM firms by establishing production facilities or distribution networks in foreign markets. This can help domestic firms expand their exports, access new customers, and integrate into global value chains, promoting economic growth and diversification. As a result, FDI can catalyse domestic investment by attracting complementary investments from local firms and suppliers. The presence of multinational corporations (MNCs) in EMs can create linkages with domestic suppliers, encourage technology spillovers, and stimulate domestic entrepreneurship. Moreover, EM governments often implement policy reforms and institutional upgrades to attract and retain FDI to improve the investment climate, enhance regulatory transparency, and strengthen property rights protection. These reforms can have positive spillover effects on the overall business environment and governance standards.
According to the latest rankings from fDi Intelligence (published in December 2023), the ten countries with the most robust FDI prospects for 2024 are spread across Asia, Africa, the Middle East, and Europe – most of which are EMs. Asia boasts six nations on the roster, with Cambodia poised to lead the pack in investment vigour this year. IMF projections anticipate robust GDP growth for Cambodia of 6.1% in 2024, from 5.6% in 2023 – positioning Cambodia as Southeast Asia’s fastest-growing economy. Strengthened trade ties with China, South Korea, and the EU further buoy Cambodia’s prospects. Moreover, the nation has reaped the benefits of a tourism rebound following the relaxation of China’s COVID-related travel restrictions in early 2023. The Philippines takes the runner-up position, with the IMF forecasting a GDP growth uptick from 5.3% to 5.9% in 2024, propelled by both public and private investments, notably in the renewable energy sector’s opening to foreign investors. Securing third place is Kenya, witnessing a surge in FDI across diverse sectors. Notably, Moderna, a US-based pharmaceutical giant, recently inked a deal to invest up to US$500mn in Kenya, earmarking it as the site for Africa’s maiden facility for mRNA vaccine production. Concurrently, Kenya’s energy sector garners significant FDI interest, exemplified by AMEA Power’s announcement to invest US$2.29bn in green hydrogen production in Mombasa. Breaking the trend, Serbia emerges as the sole non-Asian and non-African nation to clinch a spot in the top 10, securing ninth place.
The bottom line
FDI significantly promotes economic growth, enhances competitiveness, and reduces poverty in developed and developing countries. It fosters global economic integration and provides opportunities for countries to benefit from foreign capital, technology, and expertise. For EMs, in particular, FDI is critical in supporting economic development, promoting industrialisation, and enhancing competitiveness. It provides access to capital, technology, markets, and skills essential for sustainable growth and prosperity these EM economies may not have had access to previously. As EMs continue to evolve and integrate into the global economy, FDI will remain a cornerstone of their development strategies, unlocking new avenues for prosperity and progress. However, realising the full potential of FDI requires a concerted effort from governments, businesses, and international organisations to create conducive investment climates, promote inclusive growth, and address socio-economic disparities. By harnessing the transformative power of FDI, EMs can chart a course towards a more prosperous and resilient future on the global stage.
Merry March: SA inflation cools for the first time this year
In a more positive turn of events for South African consumers (following two consecutive monthly increases), headline inflation softened to 5.3% in March from 5.6% in February. The rate has held its ground between 5% and 6% since September 2023. Core inflation (excluding the more volatile price categories of food, fuel, and electricity) dropped to 4.9% YoY from 5% YoY in February. This softening of core inflation was unsurprising, given the subdued demand in the economy, the low exchange rate passthrough, and the relatively minor spillovers from elevated fuel and electricity prices. This latest print means that inflation has moved closer to the 4.5% midpoint of the SA Reserve Bank’s (SARB’s) target band of 3% to 6%, where it prefers to anchor expectations.
The categories with the highest annual price changes in March were miscellaneous goods & services (+8.5%), education (+ 6.3%), health (+ 6.0%) and housing & utilities (+ 5.9%). Notably, education fees are only surveyed once a year in March. According to Stats SA, education was 6.3% more expensive in 2024 than in 2023. This exceeds the 5.7% annual increase in 2023 and is the highest since 2020 when the rate was 6.4%. Of particular importance for SA consumers, food and non-alcoholic beverages (NAB) inflation slowed to 5.1% in March from 6.1% in February. This is down from its recent peak of 14.0% in March 2023 and is the lowest annual increase since September 2020, when the rate was 3.8%.
Food inflation is now at a three-and-a-half-year low. Looking ahead, the extreme heat and related damage to agricultural production in February through March has shown only a small impact so far at the producer price index (PPI) agricultural food price level in February. However, given the lag between production and CPI, these latest PPI data have yet to feed through into CPI food price inflation. Other notable price changes in March include inflation for alcohol & tobacco, fuelled by the annual increases in excise taxes effective from March, as outlined in the February budget. The index increased by 1.9% MoM in March. This is the highest monthly rise since March 2023, when excise tax increases led to a 2.2% monthly rise. Prices increased by 4.5% overall in the 12 months to March.
The bottom line
Looking ahead, we expect inflation to remain subdued, albeit at levels higher than initially envisioned at the beginning of the year. Core inflation (particularly that of goods) will likely remain subdued as consumer demand continues to be constrained by the pressures of elevated interest rates. Risks to the outlook appear more entrenched on the supply side – particularly regarding electricity, fuel, and other administered prices. Whilst food inflation has significantly declined in the past two months, the rising costs of maize and wheat (coupled with the effects of a drier season in certain key production regions) could potentially stall this momentum. As a result, we continue to view food prices as a key upside risk given the various ongoing supply shocks, particularly ahead of the current El Niño weather pattern and amid relatively large swings in crucial commodity prices (including oil) and the deteriorating rand exchange rate. Overall, risks to the inflation outlook remain elevated, with geopolitical tensions worsening, most notably in the Middle East. Due to these various risk factors, we believe the SARB’s Monetary Policy Committee (MPC) will not rush to cut the repo rate. Any possible interest rate cuts will likely only materialise towards the end of 2024 and depend on the inflation outlook (locally and abroad) and global interest rate developments as we progress further into this year.
SA consumers continue to battle the post-festive season blues
Retail trade sales experienced a 0.8% YoY decrease in February, following a revised contraction of 2.0% YoY in January (when adjusted for inflation). This decline reflects most local consumers’ financial constraints, compounded by the typical post-festive season burden of elevated spending. Only four of the seven sectors surveyed positively contributed to the overall performance. The largest sector, general dealers, made the most significant contribution, reflecting consumer prioritisation of essential purchases amidst challenging local economic conditions. Minor positive contributions were observed in the sales of food, beverages, tobacco products in specialised stores, pharmaceuticals, and household furnishings and appliances. Conversely, contributions from clothing (including footwear, textiles, and leather goods) and other retail sectors declined as consumers tightened their belts.
Inflation is having a critical effect on consumer affordability in SA. Despite inflation falling within the central bank’s 3% to 6% target band and staying there since June 2023, it has continued to hover well above the 4.5% midpoint, where it prefers to anchor expectations. Moreover, the SARB continues to doggedly affirm its stance to combat high inflationary pressure locally, stating that interest rates will only be cut once CPI inflation achieves (and then remains) around 4.5% YoY. Overall, SA’s path to lower inflation has become less certain and is hampered by elevated food prices and volatile energy costs, leading to higher rates for longer than expected. As such, consumers struggling to recover from excessive spending during the festive season, and the tangible effects of high inflation were evident in the sharp decline observed in February.
However, there may be a break in the clouds on the horizon. After slipping from -16 to -17 index points in 4Q23, the FNB/BER Consumer Confidence Index (CCI) improved to -15 in 1Q24. Given that the long-term average CCI reading is zero (since 1994), the latest reading of -15 points underlines a consumer environment that is still particularly gloomy. However, as we head into 2024, consumer sentiment is significantly higher than the -23 reading recorded in 1Q23, when stage-6 loadshedding, surging food prices, and successive interest rate hikes rocked consumer confidence. This suggests that retail sales volumes could gradually start to recover from the poor 2023 performance and the start of this year. A breakdown of the CCI per household income group shows that the slight improvement in overall confidence was driven by an uptick in the confidence levels of high-income households (earning more than R20,000/month). High-income confidence rose from -19 to -14 index points because of significant improvements in high-income consumers’ ratings of the outlook for the national economy and their own household finances. Whilst there has been only a minor improvement in the overall CCI reading, the uptick in the confidence of high-income consumers, in particular, is good news for the retail sector, as affluent consumers have greater spending power than low- and middle-income consumers. Nonetheless, for middle-income and low-income households, a high interest rate environment and rising unemployment will continue to push households to prioritise necessities over luxuries.
The bottom line
With retail sector performance showing disappointing results in the first two months of this year, overall activity is now averaging 1.8% below the data recorded in 4Q23. Factors such as high interest rates, sluggish disinflation, and concerns about economic activity, job security, and political stability are likely contributing to subdued consumer demand. We anticipate this trend in retail sales to persist at least through 1H24, with a potential recovery expected in the latter half of this year.
