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:
- A cautious SARB lowers the prime lending rate by 25 bps. In line with expectations, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) decided to lower the repo policy rate further by a cautious 25 bps to 7.75% p.a. at its 21 November meeting. The prime lending rate is now at 11.25%. Despite the lower-than-expected inflation print for October, it is important to remember that since the SARB’s last meeting in September, the global macroeconomic environment has grown increasingly challenging.
- Steady gains amid challenges: SA’s business confidence rises in 4Q24. The RMB/BER Business Confidence Index (BCI) climbed to 45 points in 4Q24, up from 38 in 3Q24. This marks the third consecutive quarterly increase, positioning the index nearly 20 points higher than its recent low of 27 in 2Q23.
- Mining resurgence and manufacturing malaise for SA in 3Q24. September 2024 brought contrasting fortunes for SA’s mining and manufacturing sectors. While mining production showed encouraging growth and is set to contribute positively to GDP, it remains constrained by systemic challenges and a fragile global economic environment. On the other hand, manufacturing continues to grapple with persistent weaknesses, particularly in the automotive segment, despite isolated areas of resilience.
A cautious SARB lowers the prime lending rate by 25 bps
October inflation, as measured by the Consumer Price Index (CPI), revealed a continuation of the disinflationary trend, with headline inflation printing at 2.8% YoY. This represents a sharp decline from the 3.8% YoY recorded in September. October’s print is the lowest since June 2020 (during the COVID-19 pandemic), when the rate was 2.2%. Falling fuel prices remain the key driver behind the recent slowdown. Between September and October, petrol and diesel prices dropped by 5.3%, bringing the annual fuel inflation rate to -19.1%. In October, the inland price for 95-octane petrol stood at R21.05, its lowest since February 2022, when it was R20.14. Core inflation (which excludes volatile food and energy prices to reflect underlying inflationary pressures) eased to 3.9% YoY in October, down from 4.1% in September, signalling weaker demand across most categories. Household contents and equipment continued to experience deflationary trends, with appliance prices falling further to -2.7% in October, compared to -1.7% the previous month. The slowdown extended to other sectors, including healthcare and transportation, with vehicle prices significantly contributing to the broader deceleration. The drop in core inflation, now below target, underscores the persistent financial strain on households.
Inflation in food and non-alcoholic beverages has slowed significantly, easing to 3.6% YoY in October from 4.7% in September. Overall food inflation dropped to 2.8%—its lowest level since May 2019—as the effects of the El Niño phenomenon diminished. This decline was widespread, with notable decreases in categories such as sugar, sweets, desserts, bread and cereals, and meat, which had previously driven prices higher. Vegetable prices, a major contributor in September, also cooled considerably. Tomato prices, for example, fell sharply from a 25% YoY increase to just 5.8%, while potatoes and sweet potatoes dropped from YoY spikes of 14% and 17.6% to 3.4% and 7.2%, respectively. The waning impact of the earlier black frost has further supported this broad deceleration in food inflation.
Against this backdrop, in line with expectations, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) decided to lower the repo policy rate further by a cautious 25 bps to 7.75% p.a. at its 21 November meeting. The prime lending rate is now at 11.25%. Despite the lower-than-expected inflation print for October, it is important to remember that since the SARB’s last meeting in September, the global macroeconomic environment has grown increasingly challenging. The US dollar has strengthened against most currencies, including the rand, while longer-term interest rates have risen in the US and globally. Expectations for short-term rates have also shifted higher. Monetary policy in major economies remains firmly restrictive, even as headline inflation has moderated. This moderation has created limited room for central banks to pause or ease rates. In addition, over the past two months, renewed inflationary pressures and heightened uncertainty have narrowed this policy space significantly. Core inflation remains above target in several economies, raising the risk of policy reversals should price pressures persist. The global landscape suggests central banks face a delicate balancing act, with tightening financial conditions and persistent inflationary risks complicating their ability to stabilise growth and prices simultaneously.
The bottom line
SA’s risk outlook requires a cautious approach – hence the moderate 25-bp rate cut. Furthermore, looking ahead, we view the October CPI print as marking the low point in this inflation cycle. While inflation is expected to remain subdued over the next three months, the trajectory will likely trend upward thereafter. High base effects from last year will continue to influence the data in the near term, keeping inflation readings relatively muted despite a gradual increase. However, beyond this period, several factors could shift the inflation landscape. The weakened rand is expected to play a growing role, particularly as it increases the cost of imports. Additionally, pressures in the food sector are intensifying. Below-average harvest estimates for key crops raise concerns about price increases for staples such as bread and cereals. This, in turn, could lead to higher meat prices, amplifying inflationary pressures across the broader food basket. Energy prices also remain a critical area to watch. Eskom’s proposed 36.15% electricity tariff hike poses a significant risk to administered prices, potentially fuelling inflation. Meanwhile, ongoing volatility in global fuel markets adds further uncertainty. The rand’s sensitivity to global risk aversion remains a persistent challenge, especially in the context of geopolitical tensions or shifts in international monetary policy. Together, these factors suggest a more complex future inflationary environment, requiring careful monitoring of domestic and global developments. Positively, however, the SARB’s improved GDP growth forecast, now reaching 2% in 2027, has provided increased credibility to the SA reform agenda.
Steady gains amid challenges: SA’s business confidence rises in 4Q24
The RMB/BER BCI climbed to 45 points in 4Q24, up from 38 in 3Q24, indicating that just under half of respondents are satisfied with prevailing business conditions. This marks the third consecutive quarterly increase, positioning the index nearly 20 points higher than its recent low of 27 in 2Q23. The improvement reflects stronger activity and better overall conditions than the previous quarter, with respondents expressing optimism for 1Q25. Confidence is now at its highest level since 2Q21 (50 points) and slightly above its long-term average of 43 points.
The rise in confidence was broad-based, with all sectors except new vehicle dealers recording gains. Notably, three sectors—wholesale, retail, and building contractors—reported confidence above the neutral 50-point threshold. However, vehicle dealers saw a decline, with confidence dropping from 27 to 23, remaining in deeply negative territory. Retailers (up from 45 to 54), wholesalers (from 51 to 60), and building contractors (from 41 to 51) showed significant improvements, driven partly by SA’s interest rate cuts in September. While still below the 50-mark, manufacturers saw their confidence rise from 28 to 36, despite challenges like port inefficiencies and weak global demand affecting exports. Overall, the forward-looking index also improved, reflecting greater optimism for business conditions in 1Q25, with the reading rising to 6 from 3 in 3Q24 and -17 in 2Q24.
The recovery in business sentiment has been supported by several positive developments, including the absence of loadshedding, political stability following the May 2024 elections, and a rise in consumer demand. These factors have been particularly beneficial to the retail and wholesale sectors, which have experienced notable improvements in confidence. Additionally, the gradual implementation of economic reforms has contributed to a more favourable environment, encouraging business optimism. However, sustaining and building upon these gains will require continued efforts to address persistent challenges. Red tape and high administrative costs remain significant barriers to business efficiency, while crime and corruption continue to undermine confidence, particularly in those sectors reliant on large-scale projects. The construction industry faces ongoing disruptions caused by the so-called “construction mafia,” which hampers progress and inflates costs. Furthermore, the escalating water crisis in Gauteng poses a growing risk, threatening businesses and households that depend on reliable water supply. Logistical constraints, including inefficiencies in transportation and supply chains, further impede the economy’s ability to reach its full potential. These challenges are particularly pronounced in export-driven sectors, where delays and disruptions can have far-reaching consequences. Addressing these systemic issues will require targeted, sustained reforms to improve infrastructure and governance.
The bottom line
While the recovery in sentiment is a positive sign, it remains fragile. Continued momentum in reform efforts is essential to transform this optimism into tangible outcomes, such as increased investment, robust economic growth, and job creation. Prioritising structural reforms in logistics and water management and measures to reduce bureaucracy and combat corruption will be critical to unlocking SA’s economic potential. By addressing these key constraints, the country can create a more conducive environment for sustained growth and ensure that the recent improvements in confidence translate into long-term stability and prosperity.
Mining resurgence and manufacturing malaise for SA in 3Q24
SA’s mining sector displayed notable resilience in September 2024, with production rising by 4.7% YoY. This represents a significant improvement from the marginal 0.3% YoY increase recorded in August and outperformed Bloomberg’s consensus forecast of a 2.1% YoY rise. On a QoQ seasonally adjusted basis, mining output expanded by 1.0%. This growth ensures the sector will contribute positively to SA’s GDP in 3Q24. A closer analysis of the mining data reveals that most mineral categories contributed positively to the overall performance. Out of the twelve mineral categories included in the index, only two—gold and coal—recorded contractions compared to the same period in the previous year.
The platinum group metals (PGMs) category was the strongest growth driver, rising by 6.7% YoY. This sector, constituting over 30% of the mining index, added 2.1 ppts to the headline growth figure. According to the World Bank, platinum prices are forecast to increase by 5% in 2025 and 2026, driven by constrained mine supply among major producers. Iron ore production also rebounded strongly in September, expanding by 10.0% YoY and contributing 1.3% to overall mining growth. This recovery came after two consecutive months of sharp declines in iron ore output. Furthermore, manganese and chromium ore production registered significant increases, rising by 17.3% YoY and 13.5% YoY, respectively. Together, these two minerals added 1.7 ppts to the total mining index for the month.
Despite these positive developments, SA’s mining sector remains under considerable strain. The Medium-Term Budget Policy Statement (MTBPS), tabled in late October, highlighted that mining production is still below pre-pandemic levels. Structural challenges continue to undermine the sector’s growth potential, including poor rail and port performance, regulatory inefficiencies, illegal mining activities, labour strikes, and elevated crime. These challenges have effectively counterbalanced the gains derived from improved power supply and better market conditions. Globally, risks to the mining outlook persist as weaker industrial activity in major economies dampens metal price forecasts. The World Bank has identified subdued global manufacturing as a key concern, noting that the J.P. Morgan Global Manufacturing Purchasing Managers Index (PMI) dropped to 48.8 in September. This marks the third consecutive month of deteriorating conditions, reflecting sluggish global demand and a challenging macroeconomic environment for commodities.
In contrast to mining’s positive trajectory, SA’s manufacturing sector continued to face headwinds in September 2024, with output contracting by 0.8% YoY for the second consecutive month. While the seasonally adjusted figure remained flat on a MoM basis after a 0.7% decline in August, the overall performance remained lacklustre. The manufacturing sector’s struggles were particularly evident in the motor vehicles, parts, and accessories segment, which recorded a steep decline of 18.7% YoY. Within this category, motor vehicle production plummeted by a staggering 28% YoY, underscoring the sector’s vulnerability to external and domestic challenges. This contraction contributed to a 12.2% YTD decline in the automotive industry despite occasional signs of recovery in passenger car sales. The wood and wood products, paper, publishing, and printing segments also contracted, albeit at a more moderate pace. However, not all manufacturing subsectors performed poorly. The food and beverages category demonstrated resilience, providing a degree of stability amidst broader sectoral weaknesses. Similarly, the petroleum, chemical products, rubber, and plastics segments recorded robust performance, helping offset some losses elsewhere. Additionally, the basic iron and steel, non-ferrous metals, and machinery categories held steady, buoyed by pockets of strength in specific sub-sectors.
For 3Q24, the manufacturing sector posted a modest 0.2% QoQ gain, a deceleration from the 0.6% growth achieved in the second quarter. This slowdown signals a reduced contribution to GDP from the sector, reflecting persistent structural and cyclical challenges. Looking ahead, the outlook for manufacturing remains mixed. While easing cost-of-living pressures could support demand in the near term, structural issues such as inefficiencies in infrastructure and supply chain disruptions continue to weigh heavily on the sector. Manufacturers also face a challenging global environment. The ABSA October PMI sub-index measuring expected business conditions six months hence fell to 62.7 from 70.8 in September, indicating a less optimistic outlook for operating conditions. Nonetheless, this level still suggests modest expectations of improvement in the near term, driven by a gradual recovery in demand conditions.
The bottom line
In summary, September 2024 brought contrasting fortunes for SA’s mining and manufacturing sectors. While mining production showed encouraging growth and is set to contribute positively to GDP, it remains constrained by systemic challenges and a fragile global economic environment. On the other hand, manufacturing continues to grapple with persistent weaknesses, particularly in the automotive segment, despite isolated areas of resilience. Addressing these structural and operational hurdles will be critical to unlocking the full potential of these key economic sectors.
