Sanisha Packirisamy, Economist at MMI Holdings.
Herman van Papendorp, Head of Asset Allocation at Momentum.
Sanisha Packirisamy, Economist at MMI Holdings and Herman van Papendorp, Head of Asset Allocation at Momentum discuss Momentum’s macro bulletin and gauge the South Africa macro temperature.
Global overview
SA overview
SA data snapshot
Consumer Price Inflation (CPI)
Latest: 7.0% y/y (February 2016)
Previous: 6.2% y/y (January 2016)
• Stats SA reported an increase in headline CPI from an already above-target 6.2% y/y print in January 2016 to a more worrisome 7% y/y print in February 2016. After having surprised to the downside for the most part of 2014 and 2015, the trend in positive inflation surprises reversed in early 2016 with CPI surprising to the upside for the past two inflation prints.
• The impact of the drought has started to filter through into unprocessed food prices (see chart 1). Though meat price increases remained contained below 6%, higher feed costs and herd-rebuilding (following increased slaughtering during the drought) are likely to spur higher meat inflation down the line, keeping food inflation elevated this year.
• Core inflation (headline CPI excluding food, non-alcoholic beverages, energy and petrol) increased to 5.7% y/y in February from 5.6% y/y in January. According to the Bureau of Economic Research (BER), underlying survey detail in the manufacturing, retail and wholesale sectors are pointing to a sharp deterioration in the level of average selling prices, indicative of a wider effect of rising prices across the consumer basket.
• Currency weakness and wage cost pressures have further led to stubbornly high (and rising) inflation expectations by the price setters (businesses and trade unions) of the economy. The latest BER Inflation Expectations Survey noted that the overall measure (surveying inflation expectations over the next five years) remained stuck at 6.1%.
• The SA Reserve Bank (SARB) insisted that they remain focused on the evolution of inflation expectations and will pay close attention to any indications of second-round effects of the exogenous shocks to inflation. The further uptick in core inflation in recent CPI prints and the result of escalating selling price pressures being noted in the BER sector surveys could suggest the possible emergence of such second-round inflation pressures.
Chart 1: Contribution to food inflation (% y/y)
Source: Stats SA, Global Insight, Momentum Investments
Retail sales
Latest: 4.1% y/y (February 2016)
Previous: 3.6% y/y (January 2016)
• Retail sales growth surprised to the upside once again increasing by 4.1% y/y in February and following a firm 3.6% y/y rise in January. February’s figures left the average growth in retail sales over the past six months at a firm rate of 3.7% y/y.
• According to Stats SA, growth in sales of pharmaceutical products was particularly strong at 7.8% y/y in February. This was followed by robust growth of 5.5% y/y in sales of general dealers (including grocery stores).
• Clothing retailers fared well as consumers switched out of purchases on bigger-ticket items and maintained spend on semi-durable goods. Growth in sales picked up by 4.2% y/y in February, after increasing at 3.6% y/y in January and 4.1% y/y in December 2015.
• Relatively firm retail sales data appears at odds with battered consumer sentiment levels (see chart 2) as well as the Reserve Bank’s data on household consumption, where growth slowed to 1.6% y/y in the latest data for 4Q15. According to Stats SA, 2 519 enterprises are surveyed out of a population of 23 580 enterprises for the monthly retail survey. The discrepancy in the two figures indicates weakness in the enterprises that are not covered in the Stats SA survey.
• This could point to strength in the larger retail outlets, while the smaller retailers are likely facing challenging conditions as consumers come under increased pressure on the back of a squeeze in real wage growth (thanks to higher inflation), higher interest rates, stringent bank lending criteria and slow jobs growth.
• The results of the BER’s Consumer Confidence Index highlight further downside risk to discretionary goods spend. The willingness to purchase durable goods at the present time remains in negative territory in light of higher interest rates and lacklustre growth in household credit.
Chart 2: Retail sales momentum set to slow
Source: BER, Global Insight, Momentum Investments
Vehicle sales
Latest: -13.9% y/y (March 2016)
Previous: -7.7% y/y (February 2016)
• Growth in total market vehicle sales declined in eleven out of the past twelve months. Sales (in the total vehicle market) were down by nearly 14% in year-on-year terms in March and were 1.0% weaker over the month.
• Naamsa (National Association of Automobile Manufacturers of South Africa) vehicle sales data declined by a larger 14.1% y/y in March, indicating that sales at the lower end of the vehicle market performed better.
• According to Wesbank, applications for used vehicles outnumbered new by a ratio of 2.36:1. The last time this ratio was as high was in December 2009.
• Absa noted that over 90% of their finance applications in February were for repayment terms over 72 months, suggesting that the replacement cycle for cars has been extended.
• The rental market buoyed vehicle sales in March, accounting for 8.7% of total sales and experiencing a robust increase relative to sales a year ago.
• According to Naamsa, low growth prospects and the expectation of double-digit price increases (in response to rand weakness) should keep growth in new car sales depressed this year with volumes around 10% weaker than levels experienced in 2015.
• In our view, fixed investment prospects are likely to remain in the doldrums given elevated policy uncertainty and a subdued outlook on domestic demand. As such, sales in the heavier end of the vehicle market are likely to remain under pressure over upcoming months. According to Naamsa, growth in medium commercial vehicle sales were down nearly 32% y/y in March, while sales collapsed by 8.5% y/y and 21.7% y/y in the heavy and extra heavy divisions, respectively.
• Growth in export volumes faltered following a robust performance over 2015 (see chart 3). Export sales growth averaged 25% y/y in 2015, but collapsed to an average decline of 14% y/y over the first three months of 2016.
• Nevertheless, Naamsa remains upbeat on vehicle export expectations for the remainder of the year, particularly on the back of Hilux light commercial vehicle exports destined for the rest of Africa and Europe by the middle of the year.
Chart 3: Vehicle export growth rolls over
Source: Global Insight, Momentum Investments (data up to March 2016)
Consumer confidence
Latest: -9 index points (1Q16)
Previous: -14 index points (4Q15)
• The FNB/BER Consumer Confidence Index (CCI) staged a slight rebound in the first quarter of the year to -9 index points after collapsing to -14 index points in 4Q15.
• The index remains significantly below the longer-term average, signaling depressed consumer sentiment and further headwinds to growth in household consumption in upcoming months.
• According to the BER, low commodity prices, a severe drought, subdued employment prospects and higher mortgage rates are behind the slump in consumer sentiment highlighting a low willingness to spend.
• Two out of the three underlying indices showed a recovery. Consumers’ views on their own personal finances over the next twelve months inched higher from 4 index points to 10, while their view on the economic outlook over the next year has become less negative. The economic position sub-index improved from -24 index points to -14 in 1Q16.
• Although the overall consumer index improved for all income-earning households, conditions remained depressed across the board (see chart 4). The smallest improvement was for low-income households, while the largest improvement (over a ten point jump) was in the low-middle income earning group. This could be as a result of the tax relief granted to this income-earning group announced in the February budget. Low-middle income earners’ outlook on their respective financial position a year from now also improved from 2 index points to 13 over the quarter.
• Although upper-income earners are exposed to a higher level of savings, they are facing the prospect of higher mortgage rates in upcoming months which has dampened consumer sentiment in this income-earning segment of the market. As such, the overall sentiment index for the afore-mentioned group remained in negative territory at -10 index points, inching higher from -14 points in 4Q15.
• Consumers’ rating of the present time to purchase durable goods remained in the doldrums at -22 index points. As such we expect growth in purchases of durable goods (namely cars and furniture) to remain under pressure in upcoming months particularly on the back of stringent bank lending conditions and rising interest rates.
• In the absence of an improvement in net wealth and employment gains, we see little chance of a strong recovery in consumer sentiment in the near term.
Chart 4: Broad-based consumer strain
Source: BER, Momentum Investments
Private sector credit extension
Latest: 9.0% y/y (February 2016)
Previous: 8.5% y/y (January 2016)
• Private sector credit extension (PSCE) increased by 9.0% y/y in February still largely buoyed by robust credit extension in the corporate sector, while household credit growth has been gradually inching higher.
• Household credit increased by 4.7% y/y in February, marginally higher than the 3.8% y/y average increase over 2015 (see chart 5).
• Household overdrafts picked up by 9.4% y/y in March, followed by a 7.5% y/y growth rate in unsecured loans. Growth in unsecured loans bottomed out at 0.2% y/y in mid-July 2014 and has since been rising steadily.
• Credit criteria have however tightened considerably over the course of the past two quarters, to households in particular, as economic conditions have worsened suggesting that a major uptick in household credit growth is unlikely in the short term providing an additional headwind to SA consumers.
• Growth in mortgages (accounting for less than 60% of total household credit) inched higher to 4.7% y/y in March from the average 3.2% y/y run rate over 2015. Further expected increases in the mortgage rate, as the Reserve Bank continues to respond to a rising inflation trajectory and stubbornly-high inflation expectations, could inhibit a faster acceleration in the growth of home loans going forward.
• Growth in (corporate) other loans and advances (i.e. unsecured loans which account for nearly half of the corporate credit uptake) increased by a robust 18.2% y/y (higher than the 14.4% y/y average rate over 2015). This was followed by a 10.4% y/y increase in corporate mortgages and a 6.7% y/y increase in vehicle finance.
• According to Macquarie, the ramp up in (corporate) other loans and advances could relate to the renewed momentum in government’s renewable energy independent power producer (REIPP) programme. Outside of the energy sector, however, private sector fixed investment is likely to remain sluggish owing to a subdued outlook on domestic demand and elevated policy uncertainty.
Chart 5: Tepid growth in household credit
Source: SARB, Momentum Investments
Employment
Latest: 24.5% unemployment rate (4Q15)
Previous: 24.3% unemployment rate (3Q15)
• According to Stats SA’s Quarterly Labour Force Survey (QLFS), total unemployment increased by 284 000 to 5.2 million over the course of 2015. If one includes the number of discouraged work-seekers in SA (those who have given up looking for employment opportunities for a period longer than four weeks), the total jumps to 7.5 million.
• SA’s so-called expanded rate of unemployment (taking discouraged workers into account) dipped from 36.1% in 4Q14 to 35.2% in 4Q15 (see chart 6).
• The number of employed workers increased by 698 000 over 2015, which lifted the total number of employed persons to 16 million in 4Q15. While weak commodity prices, labour unrest and drought effects have hampered job creation in the agriculture (-52 000), mining (-11 000) and manufacturing (+19 000) sectors, notable gains were realised in the private households (including domestic workers and gardeners, +234 000), government (+123 000) and financial services (+118 000) sectors.
• Employment creation since the crisis has largely been attributable to healthy jobs growth in the public sector. Rising fiscal pressures have forced government to limit compensation budgets while requiring greater efficiency from public servants.
• This implies that the private sector will increasingly be relied on to shoulder the burden of job creation. However, against a fragile growth backdrop and an uncertain policy environment, we do not expect a sharp acceleration in private sector employment growth. The BER’s sector surveys point to weak employment growth across the economy with the exception of financial services which could see mild jobs growth over upcoming quarters.
Chart 6: SA’s unemployment rate (%)
Source: Global Insight, Momentum Investments
Purchasing managers’ index
Latest: 50.5 index points (March 2016)
Previous: 47.1 index points (February 2016)
• The BER/Barclays Purchasing Managers’ Index (PMI) crossed the all-important 50-mark, signaling that SA’s manufacturing industry entered expansionary territory for the first time in eight months (see chart 7).
• Nevertheless the business activity sub-index remained below the 50-level suggesting that manufacturing output remained under pressure in March, despite the trade-weighted exchange depreciating by 19.9% on a year-on-year basis.
• Meanwhile the new sales orders index (indicative of future demand) rose by 5.2 points to 53.1, which Barclays attributes to import-substitution and a delayed uptick in export demand thanks to a weaker exchange rate.
• Employment continues to lag activity in the manufacturing sector. Despite an uptick in the headline index, the employment sub-index continued to trend below 50 at 47.2 points in March.
• Producer price inflation (PPI) has eventually caught up with the PMI price sub-index which had been signaling a build up in price pressures for some time now. Manufacturers claim that high input costs are eroding the benefits of a weaker currency as imported input costs rise. April’s fuel price increase and the scheduled above-inflation electricity tariff increase in the middle of the year are expected to keep price pressures elevated.
• We maintain a cautious outlook on the manufacturing sector given the slowdown in China and the negative impact on commodity prices, potentially resulting in adverse spillover effects into SA’s manufacturing industry.
Chart 7: Manufacturing sentiment moves above neutral
Source: INET BFA, Momentum Investments
Mining and manufacturing production
Latest mining: -8.7% y/y (February 2016), latest manufacturing: 1.9% y/y (February 2016)
Previous mining: -5.5% y/y (January 2016), previous manufacturing: -2.6% y/y (January 2016)
• Mining production volumes have contracted for six consecutive months. Growth in volumes recorded at a negative 9.4% y/y in February following a 4.4% y/y contraction in January.
• Volumes contracted in three out of the five main categories in February. These included iron ore (-32.7% y/y), PGMs (platinum group metals, -12.8% y/y) and coal (-5.1% y/y).
• SA gold producers have also taken advantage of the higher (rand) gold price. Gold and diamond production, increased by 15.6% y/y and 12.9% y/y, respectively, over the corresponding period.
• Still weak global commodity demand and an overhang in supply continue to sketch a discouraging backdrop for SA’s mining industry. Rising input costs (including electricity and labour) pose a further challenge to the industry.
• Meanwhile, growth in manufacturing production surprised to the upside, increasing by 1.9% y/y in February.
• Growth was particularly firm in the electrical machinery (8.5% y/y), wood (4.7% y/y) and petroleum (4.2% y/y) product divisions, but continued to contract in the glass (-3.7% y/y), steel (-3.3% y/y) products, vehicles/parts (-2.9% y/y) and furniture (-0.4% y/y) divisions.
• The outperformers, relative to 2008 levels, are manufacturers of electrical machinery, food/beverages and communication equipment, whereas volumes have steadily contracted in the furniture, glass products, clothing, steel products and vehicle/parts divisions (see chart 8).
• Going forward, we remain cautious on the outlook for the manufacturing sector. Soft domestic demand and still-weak global growth activity continue to constrain top-line growth while rising input costs further erodes profitability. Though the weaker rand provides an opportunity for comparatively cheaper local manufactured goods, manufacturers have experienced a rise in imported input costs.
Chart 8: Manufacturing volumes since 1Q08 (% change)
Source: Stats SA, Global Insight, Momentum Investments
Quarterly bulletin
Latest: -5.1% current account balance to GDP (4Q15)
Previous: -4.3% current account balance to GDP (3Q15)
• The SARB’s Quarterly Bulletin confirmed that real GDP growth slowed to 0.6% y/y in 4Q15 from 0.7% y/y in 3Q15.
• Growth in domestic demand remained pedestrian. Household consumption rose by 1.6% y/y in the final quarter of 2015 buoyed by pre-emptive purchases on the back of higher price expectations related to the significant sell-off in the currency in the final month of 2015. Rising interest rates, decimated sentiment, weak jobs growth and tepid growth in household credit point to a challenging outlook for the SA consumer over the next year.
• Government adhered to their fiscal consolidation path in the final quarter of 2015. Growth in government consumption slid to 0.2% y/y, reflecting a moderation in real expenditure on compensation of employees.
• Fixed investment grew at a sluggish 1.6% y/y in 4Q15. Growth in total fixed investment remains significantly lower than the average growth rate of 4.3% y/y since 1960 as private sector firms face elevated political uncertainty and soft demand conditions. Moreover, profitability levels have slowed to record lows and have failed to recover in the recent quarter. Forecasts on infrastructure spend by National Treasury point to negative growth in infrastructure spend by government and state-owned enterprises over the next fiscal year suggesting a bleak outlook on investment over the next 12 to18 months.
• Although inventories have been run down for three consecutive quarters (owing to weak demand), the pace of destocking declined.
• The decline in the residual (the unexplained portion of GDP) remained large and detracted 0.2% from overall growth in the fourth quarter of 2015.
• SA’s national savings relative to GDP deteriorated from 14.6% in 3Q15 to 14.2% in 4Q15 thanks to weaker saving by households and corporates which more than offset an increase in saving by government.
• The SARB noted that SA’s trade deficit with the rest of the world had halved between 2014 (R69 billion) and 2015 (R34 billion). Nevertheless, the invisibles deficit (services, income and current transfers) widened marginally between 2014 and 2015 from R138 billion to R140 billion. As a result, the current account deficit remained extended at 4.4% of GDP for 2015 as a whole (5.1% of GDP in 4Q15, see chart 9).
• We expect lower growth to compress imports driving a slight narrowing in the current account, while infrastructure bottlenecks and structural rigidities prevent SA manufacturers from benefiting in full from a weaker currency.
• The funding of SA’s still-wide current account deficit remains heavily reliant on portfolio flows. As such, real interest rates may have to increase further to attract foreign flows.
Chart 9: Current account deficit remains extended
Source: Global Insight, Momentum Investments, data up to 4Q15
National budget
Latest: -3.2% government deficit to GDP ratio in FY2016/17 (February 2016)
Previous: -3.3% government deficit to GDP ratio in FY2015/16 (October 2015)
• SA’s tax receipts have waned in the face of softer economic growth. The three largest contributors to overall tax (personal income tax, VAT and company income tax) have all fallen short of government’s earlier expectations in FY15/16, while property taxes, fuel levies and international trade taxes (thanks to a weaker currency) have exceeded projections.
• While generous wage settlements in both the public and private sector and a moderate relief for the effects of inflation may have contributed positively to tax buoyancy in personal tax receipts between April and August 2015, momentum has since tailed off.
• Treasury have left the door open to implementing more burdensome tax hikes in upcoming fiscal years, including ongoing limited relief for fiscal drag, increasing marginal personal income tax rates or introducing new personal income tax brackets.
• As government struggles to meet fiscal consolidation and debt targets, we are likely to see SA’s tax burden drifting higher. SA’s tax to GDP ratio is set to climb from 26.2% currently to 27.8% by FY2018/19.
• Mounting consumer headwinds have most likely led to the downward revision in the VAT target for FY2016/17 from 8.7% in the October 2015 MTBPS to 8.3% in Treasury’s latest February 2016 calculations. Government has made an effort to shelter lower-income earners by providing R5.5 billion in fiscal drag relief, while maintaining positive real growth in social grant expenditure.
• In real terms, expenditure is expected to contract by 0.6% in FY2016/17, before increasing by 0.8% on average over the next three fiscal years. This compares favourably to the estimated 1% increase in real expenditure on average over the medium term as projected in the October 2015 MTBPS.
• Government aims to curb unsustainable growth in the public sector wage bill by blocking appointments to non-critical posts and reducing headcount in administrative and managerial posts. Performance bonuses and staff promotions are to be monitored closely, while further work is being conducted to reform the wage negotiation process. Despite the 0.4% upward revision to inflation forecasts on average over the next three fiscal years, the revised compensation budget is expected to grow at a lower 7.4% p.a. over the next three fiscal years, relative to the 8.2% projection outlined in the October 2015 MTBPS.
• Government’s revised infrastructure estimates are R37 billion higher than initial projections made in the February 2015 budget.
• Treasury explained that higher interest rates, rising inflation and the significant depreciation in the exchange rate, partially offset by higher cash balances, have resulted in higher debt levels (see chart 10). The gross debt to GDP ratio is expected to peak at 51% of GDP by FY2017/18 (1.6% higher than projected in the October 2015 MTBPS), while the peak in the net debt to GDP ratio deteriorated by a further 0.8% over the corresponding period.
• Debt-servicing costs continues to crowd out other spending priorities and are expected to increase at an average rate of 11.4% y/y p.a. (5.2% in real terms) over the medium term.
Chart 10: Deterioration in debt profile (%)
Source: National Treasury, Momentum Investments
SA macro projections
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