The Coffee Table Economics (CTE) with Anchor note by Casey Sprake is distributed intermittently. It is a collection of Casey’s thoughts and perspectives on key economic factors, socio-political events, and the multiple dynamics shaping markets globally and in South Africa (SA).
Executive summary
In this week’s edition, we highlight the following:
- Golden pillars: The indispensable role of gold reserves. In the face of escalating geopolitical tensions globally, increased sanctions, and discussions around de-dollarisation, it is not surprising that interest in purchasing gold is rising. In simple terms, gold reserves are more than just a store of wealth; they are a cornerstone of economic security for individual countries and the global economy. Their role in backing currencies, providing financial security, and ensuring economic resilience makes them an indispensable asset in times of stability and crisis.
- SA consumers cheer: July inflation drops to lowest level in three years. After remaining steady in the 5%–6% range for ten months, July headline inflation, as measured by the Consumer Price Index (CPI), eased to 4.6% YoY – down from 5.1% YoY in June. This marks the lowest inflation rate in three years, matching the annual 4.6% rate recorded in July 2021.
- Resilient recovery: How tourism helps fuel SA’s economic machine. The tourism sector is a vital engine of SA’s economy, contributing to job creation, regional development, foreign exchange earnings, and overall economic growth. Its impact extends far beyond the immediate industry, making it an indispensable element of the nation’s economic success. The sector’s resilience in the face of challenges underscores its critical importance to SA’s economic future
Golden pillars: The indispensable role of gold reserves
Gold reserves are a fundamental component of the global economy and the economic stability of individual countries. The importance of gold extends far beyond its intrinsic value, serving as a vital tool in maintaining financial security, fostering confidence, and ensuring economic resilience. Gold has long been regarded as a reliable store of value, maintaining its worth over centuries and across varying economic conditions. Gold retains its purchasing power, unlike paper currencies, which can be subject to inflation and devaluation. This makes gold an essential asset for central banks globally, which hold gold reserves to safeguard their economies against economic instability. In times of financial turmoil, when the value of currencies can fluctuate wildly, gold provides a stable benchmark that helps anchor a nation’s economy.
Whilst the global economy no longer operates on the gold standard, gold reserves continue to play a critical role in backing national currencies. These reserves serve as a form of collateral, providing a tangible asset that supports the value of a country’s currency. This is particularly important during economic crises when confidence in paper currencies can erode. Gold reserves help stabilise exchange rates and reassure domestic and international investors, bolstering confidence in a nation’s financial system. For individual countries, gold reserves represent a crucial component of financial security. In times of geopolitical instability, economic downturns, or financial crises, gold is a highly liquid asset that can be quickly converted into cash or used to settle international debts. This liquidity is crucial for managing economic crises, as it provides governments with the resources needed to stabilise their economies and support their financial systems. Gold’s role as a safe-haven asset makes it indispensable during periods of uncertainty, providing a buffer against economic shocks and a useful hedge against market corrections.
As such, central banks typically hold a diversified portfolio of assets in their foreign exchange reserves, including currencies, bonds, and other financial instruments. Gold plays a pivotal role in this diversification strategy. By holding gold, central banks reduce the risk of holding other assets that may lose value due to currency fluctuations or economic downturns. This diversification enhances the stability of a country’s reserves and strengthens its overall economic resilience.
Gold’s universal acceptance also makes it a valuable tool in international trade. It fosters trust and confidence among trading partners, especially when trust in paper currencies might come into question. In addition, central banks can use gold reserves as a monetary policy tool. By buying or selling gold, central banks can influence money supply, manage inflation, and stabilise their national economy. This ability to use gold as a policy lever underscores its importance in maintaining economic stability. On a global scale, gold reserves contribute to overall economic stability, safeguarding against systemic risks, such as financial crises that could destabilise the global economy. Countries with significant gold reserves are better positioned to withstand global economic shocks, and their financial stability can have a positive ripple effect across the international financial system. Moreover, gold’s role in global trade and finance underpins the stability and efficiency of the international economic order.
It is, therefore, unsurprising that amid escalating geopolitical tensions, increased sanctions, and discussions around de-dollarisation, interest in gold purchases is rising. According to the World Gold Council, central banks, particularly those of Russia and China, have rapidly increased their gold purchases to diversify their reserves away from the US dollar. Central banks also favour gold for its safety, liquidity, and its potential for returns. Russia’s gold reserves have surged from 1,035 tonnes in 2013 to 2,333 tonnes in 2023, while China’s reserves have grown from 1,054 tonnes to 2,235 tonnes over the same period. Türkiye ranks third in central bank gold acquisitions, boosting its reserves from 116 tonnes in 2013 to 540 tonnes in 2023. Despite these increases, the US remains the leader in gold reserves, holding 8,133 tonnes, with half of these reserves stored at the United States Bullion Depository, commonly known as Fort Knox, in Kentucky. Germany follows with 3,351 tonnes, and Italy holds the third-largest reserves at 2,452 tonnes.
The bottom line
Gold reserves are more than just a simple store of wealth; they are a cornerstone of economic security for individual countries and the global economy. The role of gold reserves in backing currencies, providing financial security, and ensuring economic resilience makes them an indispensable asset in times of both stability and crisis. By holding and managing gold reserves, central banks and governments worldwide help maintain the confidence, stability, and efficiency of the global economy. As a result, gold continues to be a vital component of the financial architecture that supports the global economic system.
SA consumers cheer: July inflation drops to lowest level in three years
After remaining steady in the 5%–6% range for ten months, July headline inflation eased to 4.6% YoY – down from 5.1% YoY in June. This marks the lowest inflation rate in three years, matching the annual 4.6% rate recorded in July 2021. The decline was driven by lower annual rates across several product groups, particularly in food and non-alcoholic beverages (NAB), transport, and housing and utilities. Core inflation (excluding the more volatile price categories of food, fuel, and electricity) came in at a muted 4.3% YoY, below estimates of a 4.5% YoY print. In recent months, core inflation has remained relatively stable, consistently hovering around the midpoint of the South African Reserve Bank’s (SARB) target band. Occasional increases in core inflation, particularly from sectors like medical insurance and financial services, appear to be more related to post-pandemic normalisation rather than demand-driven inflationary pressures. While these isolated upticks are worth noting, they do not seem to jeopardise the overall stability of core inflation. This resilience is due to several factors, including the limited pass-through of exchange rate fluctuations to consumer prices, subdued demand conditions, and, importantly, the credibility and effectiveness of the SARB’s monetary policy framework – despite the pressures consumers feel due to elevated interest rates.
The annual inflation rate for food and NAB eased to 4.5% YoY in July, down from 4.6% YoY in June. This marks a continued slowdown from its recent peak of 9.0% in November 2023, bringing it to its lowest level since September 2020, when it printed at 3.8% YoY. Despite the overall decline in food inflation, the bread and cereals category is showing an upward trend, with an annual increase of 5.6% YoY in July – up from 5.2% YoY in June. Notable YoY price increases in July included rice (up 21.3%), pizza or pies (up 11.6%), and samp (up 6.9%). Meat, the most heavily weighted food group in the inflation basket, accounting for just over one-third of household food spending, saw its price index decline by 0.4% MoM, with a modest annual increase of 1.0%. Food and non-alcoholic beverage (FNAB) inflation has consistently declined over the past year, from November 2023’s peak of 9.0% YoY to 4.6% in June 2024. This decrease is due to several factors, including a moderation in bread and cereal prices, the resolution of supply disruptions in the poultry sector, and the stabilisation of vegetable prices after irrigation issues. Additionally, base effects from 2023’s high inflation rates have contributed to the apparent slowdown in price increases.
While the overall trend indicates improving food price stability, persistent inflationary pressures in certain food items and recent increases in categories like meat and vegetables show that challenges remain in fully stabilising food prices across the board. We expect a favourable food inflation environment in the near term, driven by declining grain and cereal prices, as the effects of the El Niño weather phenomenon diminish. Millers have absorbed higher input costs, limiting the impact on retail prices. Additionally, subdued consumer demand has also restricted producers’ ability to pass on elevated costs to retailers. In the meat sector, inflationary pressures are expected to stay low, barring any seasonal increases toward the end of this year, mainly due to weak demand, which has constrained producers’ pricing power.
Except for public transport, most categories within the transport group experienced lower annual inflation rates, including new and used vehicles, running costs, and fuel. Consequently, annual transport inflation eased to 4.2% in July, down from 5.5% in June. Fuel prices decreased for the second consecutive month, dropping by 3.6% YoY in July, following a 4.6% YoY decline in June. Inland 95-octane petrol was ZAc99 cheaper, falling from R24.25 in June to R23.26 in July. Similarly, the average diesel price decreased by ZAc41 during the same period – from R23.76 to R23.35. Notably, July is a high survey month for inflation as it includes the annual survey of municipal tariffs for water, property rates and electricity. This year, the electricity price increase, at 13% YoY, pushed the housing and utilities component’s contribution to inflation higher to 0.6% MoM, which was partly counteracted by some lower pressures. Interestingly, YoY tariff increases were more moderate in 2024. Electricity tariffs rose by 12.1%, down from 15.3% in 2023; water tariffs increased by 7.5%, compared to 9.6% in 2023, and property rates went up by 10.7%, compared to 8.4% in the previous year. Looking at tariffs over time, electricity prices have seen the most significant increase over the past 15 years, with an average annual growth rate of 10.5% from 2009 to 2024. This outpaced the average growth in water tariffs, which rose by 10.2% p.a., and property rates, which increased by 6.8% p.a. over the same period
The bottom line
Looking ahead, we anticipate a further decline in inflation over the remainder of 2024, potentially dropping to below 4.5% YoY by 4Q24. This anticipated decline in inflation, along with expected interest rate cuts starting towards the end of this year, is likely to boost consumer sentiment further. Naturally, the timing and extent of these anticipated rate cuts depend on the inflation outlook (locally and abroad) and global interest rate developments as we progress towards the end of the year. At this stage, we expect an initial rate cut of 25 bps in September, followed by a further 50- to 75-bp worth of cuts in 2025 and leading into 2026.
Resilient recovery: How tourism helps fuel SA’s economic machine
Tourism is undoubtedly the cornerstone of SA’s economy, playing a critical role in fostering economic growth, creating jobs, and generating foreign exchange. The sector is particularly significant in a country like SA where high unemployment rates are a harsh reality- offering employment opportunities across various fields, including hospitality, travel, and local services. Tourism’s capacity to create jobs directly and indirectly makes it an indispensable component of the nation’s economic framework. The resilience of SA’s tourism sector is evident in its recovery from the devastating impact of the COVID-19 pandemic. Income derived from the tourism accommodation sector, specifically from accommodation alone, has not only returned to pre-pandemic levels but has surpassed them. In June 2024, receipts from the accommodation sector increased by 8.9% YoY, reaching R2.45bn, compared to R2.36bn in June 2019 (pre-pandemic). This rebound demonstrates the sector’s robustness and essential role in driving SA’s economic growth and employment creation.
Foreign exchange earnings from international tourists provide a substantial boost to SA’s economy. The influx of foreign currency strengthens the balance of payments and supports local businesses, enhancing their capacity to thrive in a competitive global market. Moreover, tourism’s contribution to gross domestic product (GDP) is significant, with ripple effects felt across related sectors such as accommodation, food services, transportation, and entertainment. This interconnectivity drives investment in critical infrastructure like roads, airports, and hotels, further propelling economic development. Tourism also plays a vital role in promoting regional development, particularly in rural and economically disadvantaged areas. By attracting visitors to natural attractions, cultural heritage sites, and scenic landscapes, tourism helps reduce regional economic disparities and supports community-based initiatives. This fosters regional economic growth and ensures the country’s rich cultural heritage is preserved.
The multiplier effect of tourism means that visitors’ spending stimulates additional economic activity across multiple sectors. For example, money spent on accommodation, dining, and local attractions circulates through the economy, benefiting suppliers and service providers. This cascading effect underscores the importance of tourism as a driver of sustainable economic growth in SA.
According to the latest Stats SA data, income from accommodation rose by 7.7% QoQ in 2Q24, primarily driven by growth in the hotel category, which represents the largest share, as well as the “other” accommodation grouping. These include lodges, bed-and-breakfast establishments, self-catering establishments, and other establishments not elsewhere classified. Positive international tourism indicators further bolstered the sector’s recovery, with 1Q24’s international arrivals reaching 97% of 2019 levels.
The UN Tourism World Tourism Barometer published four times p.a.,monitors short-term tourism trends to provide global tourism stakeholders with an analysis of international tourism. The Barometer includes a Confidence Index based on the UN Tourism Panel of Tourism Experts survey, which evaluates the recent performance and the short-term prospects of international tourism. The UN Tourism Confidence Index also reflects positive prospects for the future, although economic and geopolitical challenges remain significant risks to a complete recovery. SA’s tourism sector has seen encouraging growth in international arrivals, with 134,396 overseas travellers visiting the country in June 2024 – a 9.2% YoY increase. YTD, overseas traveller numbers are up by 8.2% compared to the previous year, with notable increases from such key markets as the US and the UK. Particularly striking is the 162.9% YoY jump in arrivals from Brazil between January and June 2024.
In addition to boosting international arrivals, growing domestic tourism is vital for the sector’s sustainability. In 2023, 38mn domestic trips were recorded, contributing R121bn in spending. It is, therefore, unsurprising that the Minister of Tourism has frequently emphasised that domestic tourism is the “bedrock” of the sector and highlighted ongoing efforts to make travel inside SA more affordable and accessible for local travellers. These initiatives are crucial in ensuring the long-term stability and growth of the domestic tourism industry.
The bottom line
Overall, the tourism sector is a vital engine of SA’s economy, contributing to job creation, regional development, foreign exchange earnings, and overall economic growth. Its impact extends far beyond the immediate industry, making it an indispensable element of the nation’s economic success. The sector’s resilience in facing challenges underscores its critical importance to SA’s economic future.
