Central banks take centre stage

Jackson Hole paves the way for rate cuts 

The Jackson Hole Economic Symposium, hosted annually by the Federal Reserve Bank of Kansas City, took pride of place as a key monetary policy watch point in August. The speech by Federal Reserve Bank Chair Jerome Powell was keenly anticipated, with market participants searching for clues on the timing and pace of interest rate cuts in the coming months. Powell did not disappoint, clearly signalling that macroeconomic conditions in the US call for an imminent easing in monetary policy. This aligns with our view that the Federal Open Market Committee (FOMC) will cut interest rates in September and continue to moderately normalise its real policy rate in the months ahead.   

The European Central Bank (ECB), which would have had the benefit of being able to dissect additional macroeconomic data points since retaining the refinance rate at 4.25% in July, is also likely to continue its monetary policy easing cycle with a second 25-basis point cut in September. However, mindful of the delicate balance they will need to strike between their policy objectives, Governing Council members rightfully continue to caution against cutting interest rates too quickly and unwittingly ingraining elevated inflation expectations.   While developed market central banks are broadly consumed with suitably calibrating the timing and pace of policy easing, the Bank of Japan will continue its monetary policy normalisation process by hiking its policy rate and tapering its asset purchase program in the months ahead.  

Figure 1: Fed Dot Plot vs US Forward Curve  

Source: Bloomberg, Futuregrowth  

Domestic inflation surprises to the downside 

The recent trend of downside surprises in domestic inflation statistics persisted in July, with the domestic headline Consumer Price Index (CPI) receding to 4.6% year-on-year from 5.1% in June. This marked the lowest headline inflation print since July 2023 and beat the median estimate of 4.8% from the survey of 16 economists before the print. Moderating food and energy price pressures were behind the downside surprise in consumer price inflation. Producer price inflation also moderated in July, receding to 4.2% year-on-year from 4.6% in June and beating surveyed expectations of 4.5%.   

In addition to the broad downward trend in consumer prices in recent months and the moderate easing in inflation expectations, the recent downside surprises in inflation statistics all but cemented the likelihood of an interest rate cut by the South African Reserve Bank (SARB) in September.   

In a split vote at its July meeting, the SARB Monetary Policy Committee (MPC) voted to retain the 8.25% monetary policy rate. While we expect the MPC to remain cautious in its communication and policy guidance, citing the two-way risk to its inflation outlook and the need to anchor inflation expectations at the midpoint of the inflation target band, the grounds have been laid for the commencement of a gradual and shallow interest rate cutting cycle.   

Figure 2: RSA Headline inflation forecast (year-on-year) 

Source: Bloomberg, Futuregrowth  

High-frequency data gives mixed signals 

August marked another month of no loadshedding. Eskom’s weekly generation capacity reports continue to highlight the electricity supply resilience, with the Energy Availability Factor (EAF) across the large coal-fired power plants, including the beleaguered Medupi and Kusile, hovering around 70% in recent months – marking a remarkable turn from the near 50% EAF at the start of the year.   Eskom has not implemented loadshedding since March 2024, with stabilised electricity generation feeding into improved business and investor confidence, a necessary precondition to stimulating macroeconomic growth in South Africa. The policy reform agenda, driven by Operation Vulindlela, has been instrumental in stabilising South Africa’s electricity production constraint. We now look to its influence in improving port, rail and logistics inefficiencies in the coming months and years.   

Other high-frequency macroeconomic indicators continually point to a strained economic backdrop and a modest growth outlook for 2024 despite the marked improvement in electricity production. These include mining production, which declined by -3.5% year-on-year in June, and manufacturing production, which contracted by -5.2% year-on-year. Both high-frequency growth indicators significantly surprised to the downside relative to surveyed expectations.   

Real retail sales jumped by 4.1% year-on-year in June, suggesting some consumer resilience. However, this hope is belied by persistently weak household credit growth, which grew by a modest 3.3% year-on-year in June and retains its negative growth rate in real terms. Credit lending standards have not been important determinants of monetary policy in the current hiking cycle. They nonetheless highlight the weakness of aggregated demand and will lend support to the arguments for monetary policy easing in the second half of 2024.   

GFECRA boost masks revenue slowdown 

National Treasury executed its plan to draw from the unrealised profits from the Gold and Foreign Exchange Reserve Contingency Account (GFECRA) in July. Rand depreciation had inflated GFECRA’s unrealised profits to R532 billion at the end of March 2024, with drawdowns of R250 billion planned for the current and forthcoming two fiscal years. In July, National Treasury transferred R80 billion from the account and realised it as non-tax revenue to save on debt servicing costs and reduce its borrowing requirement.   

Excluding GFECRA, there’s evidence of slippage in year-to-date fiscal revenue relative to recent years. Year-to-date gross tax revenue grew 3.4% in July relative to the 6.0% tabled in the February Budget. Corporate income tax and value-added tax are the main sources of revenue weakness, contracting by -6.8% and -2.8%, respectively, relative to the 0.4% and 7.1% tabled in the February Budget. Personal income tax revenue remains buoyant on a year-to-date basis, nearly matching the 13.7% that the National Treasury expect for the fiscal year. On the other hand, government expenditure has risen by 5.5% on a year-to-date basis, marginally ahead of budgeted expectations. It is too soon to predict a trend, but extrapolating the year-to-date fiscal trends puts expectations tabled in the February Budget at risk.   

While a gradual interest rate cutting cycle is our base case, the threat of a hard landing in the US and the concomitant risk to the domestic economy remains. Although fiscal consolidation still seems likely this year, fiscal flexibility remains a constraint for government finances in the medium term. A small, open economy like South Africa remains significantly exposed to exogenous shocks, with little room to effect meaningful counter-cyclical fiscal policy in the event of an economic downturn. In our estimation, a trend growth rate approaching 3% per annum remains necessary to achieve debt sustainability within the current fiscal framework. About 5% per annum is needed to make progress towards meeting our socio-economic goals of inclusive growth and poverty eradication. 

Liberalising our electricity production was a necessary precondition for stimulating economic growth. Other policy initiatives spearheaded by Operation Vulindlela, including improving port and rail logistics, remain key to unlocking higher levels of sustained economic growth.    

Figure 3: Year-to-date fiscal revenue intake relative to 2024 budget estimates 

Source: National Treasury, Futuregrowth  

Long-dated fixed-rate bonds lead the charge 

The domestic nominal yield curve shifted lower in August, driven by the confluence of continued demand for domestic bonds following the formation of the Government of National Unity and the market pricing in an imminent interest rate-cutting cycle. ALBI +12 years was the best-performing segment of the nominal bond curve, generating a total return of 3.14% for the month relative to the ALBI total return of 2.38%. Cash, proxied by the SteFI Call Deposit Index, delivered a return of 0.67% for the month, with the IGOV Index, comprised of sovereign-issued local currency inflation-linked bonds (ILBs), returned 2.22%. 

Figure 4: Bond market index returns (periods ending August 2024) 

Source: IRESS, Futuregrowth 

/// THE TAKEOUT: The Jackson Hole Economic Symposium took pride of place as a key monetary policy watchpoint in August. Jerome Powell did not disappoint, clearly signalling that US macroeconomic conditions call for an imminent easing in monetary policy. Domestically, in addition to the broad downward trend in consumer prices and the moderate easing in inflation expectations, the recent downside surprises in inflation statistics all but cemented the likelihood of an interest rate cut by the South African Reserve Bank (SARB) in September. While we expect the MPC to remain cautious in its communication and policy guidance, the grounds have nonetheless been laid for the commencement of a gradual and shallow interest rate cutting cycle.