The African International Liquidity Position, reflected in the Net Gold and Foreign Exchange Reserves, saw a decline in U.S. dollar terms but a modest increase in rand terms for November 2024. Despite a slight drop in the dollar value of reserves, a 20-cent depreciation of the rand against the dollar enhanced the rand value of these reserves. Gold reserves decreased in both rand and dollar terms due to a 4.5% monthly drop in gold prices; however, the dollar price remains 30.6% higher than in the same period in 2023.

Foreign exchange reserves significantly increased from October 2024, despite minor rand depreciation following the re-election of former U.S. President Trump. Key commodities for South Africa, including gold, oil, platinum, and coal, provide valuable insights into the mining sector, fuel prices, and future inflation. Understanding these trends is crucial as inflation expectations will influence the South African Reserve Bank’s Monetary Policy Committee (MPC) in its interest rate decisions for January 2025 and beyond.

In November, the gold price dipped slightly, influenced by the U.S. presidential election and potential de-escalation in tensions in Eastern Europe and the Middle East after Trump takes office again in January. Coal and international oil prices remained relatively stable, while platinum declined by approximately $40 per ounce.
A stable rand and stable oil prices favour positive inflation expectations and future interest rate decisions in January 2025. However, the situation could change rapidly; further escalation in the Middle East may increase international oil prices and lead to rand depreciation.

It’s important to note that the rand may remain soft and volatile in the coming weeks, particularly with Trump’s return to the White House in January 2025. His protectionist economic policies and potential foreign policy shifts could impact the rand’s performance in the near term.

Company is a significant concern for both investors and the government. Investors assess potential returns, while the government evaluates how policy changes affect tax revenue and the broader economy.

A fundamental way to gauge profitability in an economic sector is by estimating the Gross Operating Surplus (GOS) at specific intervals, such as quarterly. The latest data from Statistics South Africa (Stats SA) for the third quarter of 2024 shows that GOS can be erratic but generally follows GDP inflation trends, as demonstrated in the accompanying graph. In Q3 2024, company profits were 2.9% lower compared to the previous quarter but increased by 4.5% compared to the same period in 2023. This rise in profits slightly outpaced GDP inflation, indicating a marginal growth in profitability.

The overall annual growth in GOS is a positive sign, as rising profitability enhances the potential for investment and further economic expansion. Notably, profits in the mining, transport, and personal services sectors grew at rates exceeding inflation during this period. Such profitability increases often lead to higher employment, production, and overall sector profitability in the medium term, if the trend continues.

The sustained annual rise in total GOS reflects encouraging market sentiment throughout the economy. This growth enhances production output and returns for all market participants, positioning South Africa for a much-needed increase in investment over the medium to long term.

Out of ten sectors, six experienced growth, while general government, transport, storage, communication, and trade sectors faced contractions. The agricultural sector was the largest detractor, with a significant decline of 28.8% quarter-on-quarter, contributing 0.7 percentage points to the overall economic contraction. This downturn is unexpected, especially considering employment in agriculture rose from 896,000 in the second quarter to 935,000 in the third quarter.

On a positive note, manufacturing grew by 0.5%, bolstered by improved Purchasing Managers’ Index (PMI) figures and fewer electricity supply constraints, as evidenced by a 1.6% growth in the electricity sector. The finance sector, the largest contributor to GDP, grew by 1.3%, similar to the previous quarter’s 1.5% growth, adding 0.3 percentage points to help mitigate the slowdown caused by the agricultural decline.

However, the trade sector’s notable slowdown remains concerning. Consumer demand, reflected in this sector, contracted by 0.4% quarter-on-quarter and another 2.0% year-on-year, following a previous 2.0% decline. High inflation, elevated interest rates, and stagnant wages continue to pose challenges for consumers.

For 2024, overall growth is estimated at 0.7%, the same as in 2023, which is insufficient to significantly address South Africa’s high unemployment crisis. However, increased market optimism, reductions in load-shedding, and a 50-basis point cut in interest rates could positively influence economic activity for the remainder of 2024 and into 2025.

Key challenges persist for businesses, and the government must deliver on promises related to policy clarity and tangible progress on structural reforms announced earlier this year. By addressing these key issues, there is potential to enhance business confidence, which is essential for driving higher economic growth in the coming months—something South Africa urgently needs.

In 2024, credit extended by financial institutions in South Africa increased by 4.3%, following a 4.6% rise in September. This growth was slightly below the market’s 4.5% expectation for September. While credit demand rose across most sub-categories, it remains low, despite the interest rate reduction that occurred in September.

Mortgage advances and credit for acquiring fixed assets remain sensitive to interest rates, and the 25-basis point cut in September hasn’t significantly impacted property demand yet. The recent interest rate reduction in November, totalling 50 basis points for 2024, will likely take time to influence the market, with expected benefits becoming apparent in 2025 as households and businesses gain greater disposable income.

In October, instalment credit sales increased by 0.8%, up from 0.5% in the previous month, reflecting a year-on-year growth of 7.2%. Over the past two years, consumers have increasingly relied on short-term credit to manage financial pressures and rising living costs, as shown by a 4.8% increase in loans and advances, following a 5.0% rise in September.

Growth in asset accumulation through property and fixed asset purchases remains modest, with mortgage advances rising by just 3.1% in October. This slowdown in growth rates for mortgage advances in late 2023 is primarily attributed to the impact of higher interest rates on the property sector. However, the 50-basis point reduction in interest rates should enhance demand for properties and fixed assets in the months ahead, likely becoming evident in 2025. As lower interest rates translate to increased disposable income for consumers, overall demand for goods and fixed assets may also see a boost moving forward into 2025.

In September 2024, producer price inflation experienced a significant slowdown. The annual increase in producer inflation was recorded at 1.0%, down from 2.8% in August, with a monthly deflation of 0.3%. Production costs for food and beverage items rose by 3.8% in September, contributing 1.1 percentage points to the month’s overall producer inflation. Additionally, the categories of metals, machinery, equipment, and computing reported lower-than-expected price increases, climbing 3.4% year-over-year compared to 3.5% in the previous month, and adding 0.5 percentage points to total producer inflation.

Several segments within the producer price inflation basket experienced deflation once again. Significant declines were noted in the coke, petroleum, chemicals, rubber, and plastic products categories, which fell by 2.1% year-on-year, leading to a reduction of 0.5 percentage points in overall producer inflation.

Production costs for intermediate goods saw a slight increase from 4.2% in August to 4.8% in September, with no month-on-month price escalation. The main contributors to the annual increase included the chemicals, rubber, and plastic products category, which rose by 8.1% in September, adding 2.5 percentage points to total intermediate producer inflation, and basic and fabricated metals, which increased by 3.6%, contributing an additional 1.7 percentage points. Meanwhile, the costs of water and electricity remained elevated, with a 9.8% annual rise in September, up from 7.1% the previous month.

In the primary sector, mining costs further contracted by 4.8% following a contraction of 1.7% in August. In contrast, the agricultural sector reported a 3.6% increase in production costs, a decrease from 6.1% in August.

Overall, the trend in producer price inflation is positive for general inflation expectations in South Africa, as producer inflation serves as a leading indicator of overall inflation in the country’s economic landscape. However, the continued rise in prices for intermediate goods, especially for water and electricity, remains a concern since these rates exceed the South African Reserve Bank’s (SARB) target range of 3% to 6%. The current producer inflation figures suggest a potential reduction in overall consumer inflation in the coming months, which is favourable for our interest rate and demand forecasts for the remainder of 2024.

The interest rate has been reduced by another 25 basis points, even though some market analysts anticipated a 50-basis point cut. This cautious approach by the South African Reserve Bank highlights their commitment to careful monitoring. The Reserve Bank has noted that inflation remains contained, with core inflation staying within the target range of 3% to 6%. Additionally, rising confidence levels and a stable electricity supply are promising signs for growth in late 2024 and into 2025, with economic growth projected at 2.0% for 2027.

Commissioner Lesetja Kganyago emphasized that there are still upside risks related to inflation, particularly due to anticipated increases in administered prices for electricity and water. On the demand side, the economy appears to be rebounding, bolstered by increased disposable income following withdrawals from the two-pot pension system. However, he pointed out that the supply side remains subdued, as manufacturing production numbers came in lower than expected.

The Governor also noted that the economy seems to be gradually recovering, following several reforms implemented under the new Government of National Unity (GNU), as evidenced by a decrease in unemployment numbers during the third quarter of 2024. The Bank’s inflation forecast for 2025 is around 4.5%, and future interest rate decisions will be data-driven based on current economic conditions.

Retail sales in South Africa once again exceeded market expectations in September 2024, growing by 0.9% annually and comfortably surpassing the predicted contraction of 0.7%. This growth indicates a modest resurgence in consumer demand, suggesting that consumer behaviour may be improving, especially as Business Confidence increased from 38 to 45 index points. Additionally, lower consumer inflation and an anticipated interest rate reduction by the South African Reserve Bank could further enhance consumer demand.

The growth in retail sales was largely driven by general dealers, who reported a 4.5% increase, contributing 2.1 percentage points to total growth. However, the largest negative impact came from retailers of textiles, clothing, footwear, and leather goods, which contracted by 5.5%, causing a reduction of 0.9 percentage points in overall growth.

Despite this positive trend, households remain cautious due to tight budgets and relatively high interest rates, even after the 25-basis point cut in September and another reduction expected in November. The effects of the September rate cut will only be visible in the October data, set to be released in December 2024. If the anticipated rate reduction in November occurs, it may boost consumer confidence and stimulate slightly higher consumer demand, ultimately contributing to the economic growth that South Africa desperately needs.

Inflation in South Africa declined from 3.8% in September to 2.8% in October 2024, marking a monthly deflation of 0.1%. The inflation rise in September was primarily driven by:

• Housing and utilities: up 4.8%, contributing 1.1 percentage points
• Miscellaneous goods and services: up 6.8%, adding 1.0 percentage point
• Food and non-alcoholic beverages: up 3.6%, contributing 0.7 percentage points
• Alcoholic beverages and tobacco: up 4.5%, adding another 0.3 percentage points

Although these categories continue to see price increases, the rate is slowing. However, these rising costs still strain household budgets, eroding the purchasing power of consumers and businesses. Even with slower price growth, affordability remains an issue, leading many households to rely more on credit to maintain their lifestyles. This reliance heightens vulnerability to interest rate hikes and rising product prices among already indebted consumers.

It’s important to note that these price increases are largely driven by external factors rather than domestic demand, including electricity supply issues, costs associated with alternative power generation, and rising import prices that are passed on to consumers. Additionally, the recent depreciation of the Rand following Donald Trump’s re-election may have some short-term effects on its value.

On a positive note, the US Federal Reserve recently lowered its interest rate by 25 basis points to stimulate the US economy. This move could benefit South Africa, allowing the South African Reserve Bank (SARB) and its Monetary Policy Committee (MPC) to potentially lower local interest rates more aggressively than originally planned.

With moderating inflation, better-than-expected economic growth, improved electricity supply, and positive market sentiment, the SARB is likely to consider cutting interest rates further in November 2024. Such a reduction might boost demand and ease pressure on household finances, contributing to stronger economic growth in South Africa than previously anticipated for 2024 and into 2025.

Mining production in South Africa rose by 4.7% in September 2024, building on a modest 0.3% increase in August. Key contributors to this growth included:

• Iron ore: up 10.0%, adding 1.3 percentage points
• Platinum Group Metals (PGMs): up 6.7%, contributing 2.1 percentage points
• Manganese: up 13.5%, contributing 0.9 percentage points
• Diamonds: up 35.4%, adding 0.5 percentage points
• Chromium ore: up 17.3%, contributing 0.8 percentage points

However, coal production declined by 4.4%, reducing growth by 1.0 percentage points, while gold production fell by 3.7%, leading to an overall reduction of 0.5 percentage points in mining production.

In September 2024, mineral sales increased by 8.0%, rebounding from a 10.7% decrease in August. Significant sales increases included:

• Manganese ore: surged 48.3%, boosting performance by 5.1 percentage points
• Chromium ore: increased by 19.4%, adding 1.5 percentage points
• Coal: up 5.9%, contributing 1.5 percentage points
• Gold: increased by 42.3%, adding another 5.1 percentage points

Despite these gains, PGMs experienced a significant decline in sales, dropping 15.9% and reducing total mineral sales value by 4.3 percentage points.

The mining sector remains vital to South Africa’s economy, driving foreign exchange and employing approximately 484,000 people directly, according to StatsSA data. After facing serious challenges from late 2022 to 2023—stemming from electricity supply issues and infrastructure bottlenecks, particularly at ports—production volumes have begun to recover in early 2024 and again in September following a slump from April to August.

The sector appears to be rebounding from a low base, supported by improved economic confidence following the still recent general elections and enhanced electricity availability. Looking ahead, mining production is expected to stabilise and grow moderately over the coming months due to increased confidence in the sector. However, mining firms remain cautiously optimistic about maintaining consistent electricity supply and resolving infrastructure challenges in the medium term, as promised by the Government of National Unity

In September 2024, manufacturing production in South Africa experienced a 0.8% annual decline, mirroring a revised contraction of 0.8% in August. This downturn is surprising, given an increase of nearly 9 points in the Purchasing Managers’ Index (PMI), which rose from 44.2 in August to 53.3 in September.

The drop in production volumes is primarily due to an 18.7% decrease in the manufacturing of motor vehicles, parts, and accessories, resulting in a 1.7 percentage point reduction in overall manufacturing growth. On a positive note, the food and beverages sector saw a 1.2% annual growth, contributing 0.3 percentage points. Additionally, the petroleum, chemical products, rubber, and plastics sector grew by 3.1%, adding another 0.6 percentage points to overall manufacturing growth, which helped mitigate declines in other areas.

The seasonally adjusted value of sales in the manufacturing sector fell by 1.2% year-on-year in September. Quarter-on-quarter, seasonally adjusted manufacturing sales for the third quarter of 2024 also decreased by 0.9%. The primary contributor to this decline was the motor vehicles, parts, and accessories division, which decreased by 13.3%, contributing 2.2 percentage points to the quarterly contraction. Conversely, the largest positive contributors to quarterly growth were the petroleum and chemical products category, which rose by 3.2% and added 0.7 percentage points, and the food and beverages category, which increased by 2.4%, contributing 0.6 percentage points.

The manufacturing sector remains crucial to the South African economy, being the continent’s most industrialized sector. It currently employs approximately 1.6 million people and accounts for about 12.5% of South Africa’s GDP. Growth in this sector is essential for job creation and labour absorption in the economy.

However, business owners in the manufacturing sector remain cautious, adopting a “wait-and-see” approach towards investment and medium-term growth. Reports from the Reserve Bank and commercial banks indicate that corporate South Africa retains significant cash reserves. Companies appear to be awaiting clarification from the Government of National Unity (GNU) on industrial policy and the implementation of necessary reforms, which were recently promised by President Cyril Ramaphosa during the launch of Phase 2 at the Industrial Development Corporation (IDC) in October 2024.