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Writer's pictureDr Roelof Botha

On Balance - Economic Update August

The downside

Pessimists were bitterly disappointed during August. However, a raft of macroeconomic indicators cheered consumers and businesses, mainly due to another month without load-shedding, lower fuel prices, and lower inflation. Nevertheless, South Africa's economy is not out of the woods yet.


The vastly improved level of electricity supply masks a brand-new concept by Eskom, namely "load reduction." This concept represents an effort by Eskom to minimise the risk of overloading the power grid. By reducing the load in specific high-density areas with high electricity usage during peak times, the grid's stability can be retained, preventing widespread blackouts.


The Absa/BER purchasing managers' index (PMI) for the manufacturing sector also dipped in August despite the 6-month forward-looking index remaining well above the neutral level of 50.


With the consumer price index (CPI) now having dropped to virtually the mid-point level of the inflation target range and the country battling to create jobs in a lacklustre economy, it is strange that the Reserve Bank's Monetary Policy Committee (MPC) has not called a special meeting to signal the end of its overly restrictive policy approach by reducing the repo rate. Lower interest rates are desperately required to revive higher growth and job creation.


The upside

JSE all share index hits new record high


On 27 August, the all-share index (Alsi) on the Johannesburg stock exchange (JSE) closed at a record high of 84,553. This represents a 47% increase over the index value of 57,336 recorded on 21 February 2020, just before the brief COVID-induced downturn experienced by equity markets worldwide.

JSE all share index hits new record high

The Alsi's rate of recovery since before the Covid pandemic is positioned between the German Dax (38% increase) and the S&P 500 of the US, which has surged by more than 67%. The latter rate has been made possible by the solid performance of hi-tech companies, several of whom have embarked on substantial investments in artificial intelligence (AI) development.


Viewed from the perspective of share valuations and dividends, it is evident that many blue-chip companies in South Africa currently offer more attractive price/earnings (P/e) ratios and dividend yields than several other vital bourses. With the International Monetary Fund predicting global economic growth of 3.3% next year (marginally higher than in 2024), prices of South Africa's essential export commodities are bound to continue an upward trend, led by gold and other minerals, which could raise the Alsi to even higher levels over the medium term.


Consumer inflation drops to below 5%

The further decline in the consumer price index (CPI) to just above the mid-point of the Reserve Bank's target range is excellent news for debt-laden households. The CPI has now been comfortably within the target range of 3% to 6% for 14 successive months, signalling the strong likelihood of an interest rate cut in September.

Consumer inflation drops to below 5%

The debate is now shifting from whether the repo rate will be cut to the scope of the reduction. A cut of 50 basis points has become realistic, especially against the background of low economic growth, rising unemployment, and households facing the highest ratio of debt costs to disposable income in 15 years (9.2%).


The sharp decline in South Africa's 10-year bond yield underpins the optimism over sizeable rate cuts over the next 12 months. Since the end of April, the country's benchmark long-term interest rate has dropped by almost 200 basis points, suggesting that the MPC has been caught napping due to the positive long-term correlation between lending rates and bond yields.


Currency strength, which has already led to several declines in fuel prices, is bound to lower inflation during the rest of the year.


Loadshedding may end in March next year.

Ever since the second quarter of the year, a remarkable turnaround has been achieved in the stability of the electricity supply, with an absence of rotational load shedding. When demand is high, accomplishing this feat during winter deserves praise.


Despite the ongoing concerns about Eskom's ability to maintain a stable supply, CEO Dan Marokane's optimism is reassuring. His belief that the utility is well-positioned to avoid load-shedding during the high-maintenance summer months is a positive development.


 
Dr Roelof Botha

On Balance by Dr Roelof Botha deliberately emphasises positive news that, more often than not, emphasises the resilience of the South African economy and the immense scope for new business opportunities.

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