Despite an improvement in fiscal outlook, the second quarter is set out to be tougher for growth dynamics due to economic disruptions and persistently elevated inflation rates.
The second quarter seems set to be much tougher for growth dynamics. Incoming economic releases for April deteriorated on the back of the disruption and damage from flooding in KwaZulu-Natal and persistent load-shedding. Strikes and wage negotiations grabbed headlines, with above inflation demands. While there was some resolution in the platinum sector, the broader industrial action, especially in the gold sector, continues and is likely to weigh on mining output.
With energy availability from Eskom still suboptimal, it is constructive to note that the first two private projects for generation below 100MW (both solar) were approved in May, marking a milestone in energy reforms and better prospects. The National Prosecuting Authority (NPA) made some high-profile arrests in May, a step forward in the journey to accountability. Consumers received some reprieve from the meaningful increase in fuel prices at the start of June, with an extension of the reduction in the fuel levy for another two months. Credit ratings agency S&P upgraded the outlook for South Africa’s credit rating to positive from stable, a surprise move that reflects an improved fiscal outlook.
Headline inflation printed 5,9% year-on-year in April, reflecting high fuel and food prices. Producer price inflation painted a grimmer picture, exceeding market expectations with a 13,1% increase over the year. Food producers like Tiger Brands have cautioned that input costs will increasingly be passed on to the consumer.
With the outlook for inflation worsening since the March meeting, the South African Reserve Bank (SARB) increased interest rates by 50bps. Four members voted in favour of a 50bps hike and one in favour of a 25bps hike, underscoring a hawkish stance akin to global peers. Global market volatility weighed on the local bond market and the currency, but declining global bond yields and a weaker US dollar allowed some strength to return into month-end. The All Bond Index gained 1,0% in May and the rand appreciated by about 1,2% against the US dollar. Local equity markets were largely flat, with variation between the different headline indices. The FTSE/JSE All Share Index edged down 0,4%, while the FTSE/JSE Capped SWIX 40 gained 1,1%, in part due to the representation of luxury retailer Richemont, which saw a price decline of 8,4% over the month.
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