The focus in the week ahead is naturally on the critical election, which aptly overshadows the Reserve Bank’s interest rate meeting on the following day. At that meeting, we expect the Bank’s Monetary Policy Committee to keep the policy interest rate unchanged (premised on our assumption that the election will not trigger any material currency weakness that could ultimately be inflationary).
The discussion at this meeting will likely remain quite cautious about persistent upside risks to the inflation forecasts, emphasising the slow easing of inflation to the midpoint of the target range. We expect inflation to largely drift sideways in the second and third quarters of this year, before sustainably reaching the midpoint of the Bank’s 3-6% target from the fourth quarter. This still sets the scene for interest rate cuts from the third quarter of 2024, in our view, though this would, like in many other countries, be somewhat later than was widely expected initially, thus postponing the relief that we foresee for consumers from interest rate cuts.
The interest rate cuts that were initially widely expected in the first half of this year would have provided welcome relief for consumers who are confronting an unusual combination of positive and negative factors. They are mainly supported by two tailwinds. First, total employment increased by 552,000 in the year to the first quarter of 2024, while (our proxy based on the official data for) formal non-agricultural private sector employment increased by 470,000 over this period. If the latter just remains at its level in the first quarter of this year, it would on average be 3.5% higher this year than last year, thus providing material support for any comparison of the consumer in 2024 versus 2023.
Second, inflation has declined to 5.2% year on year in April (the latest data available, released last week) from 7.1% in March 2023; we expect average inflation to be nearly one percent lower this year than last year (at 5.1% year on year in 2024 from 6% in 2023). The decline in food inflation to just 4.4% year on year in April, from a recent peak of 14.4% in March 2023, in particular should provide relief to consumers.
However, the above-mentioned tailwinds are being counteracted by the headwinds from fiscal drag (not adjusting income tax thresholds for inflation in the budget), restraint in the government’s wage bill as part of the fiscal consolidation ambition, and uncertainty related to the election and general macroeconomic outlook. Furthermore, the robust boost from households’ dividend income from 2021 to 2023 has been fading.
We still expect the year-on-year growth in real household consumption expenditure to be slightly stronger this year than last year but, so far, the consumer-related data is quite mixed. Retail sales grew by a negligible 0.1% quarter on quarter (seasonally adjusted) in the first quarter of 2024, and contracted by 0.9% over this period in real terms (when adjusted for inflation). Seasonally adjusted household bank debt also grew only 0.8% quarter on quarter in the first quarter of 2024 (in nominal terms, in other words, without adjusting for inflation; it contracted in inflation-adjusted terms).
At the same time, there are indications — albeit very tentative and marginal — from one of the credit bureaus’ data that select credit metrics are improving: overdue loans have declined marginally in the first quarter, while there has been a slight increase in borrowers that are up to date on all their loans. Consumer confidence nudged higher and is notably higher than a year earlier; while they are still very concerned about the macroeconomic prognosis, their perceptions of their personal finances improved to its long-term average.
An interesting development this year could be that the state of consumers across the income spectrum turn slightly less uneven. The high-income groups have, after the plunge in 2020, benefited from strong growth in their investment income, but this is now slowing materially. This while the low- and middle-income groups will now benefit most from the recent broadening of the employment recovery, while they are also more sensitive to the relief from easing inflation. Indeed, for the first time since 2020, Standard Bank’s client data shows growing pressure on the income of the high-income groups, amid more resilience among the low- and middle-income groups. (This may reflect other factors in addition to those described above.).
In short, despite persistent challenges, we foresee modestly stronger real growth in total household consumption expenditure in 2024 than the meagre 0.6% year on year in 2023. This, however, is premised on our general macroeconomic assumptions, including that the upcoming general election will support general policy continuity (particularly in respect of the overarching macroeconomic policy framework, the fiscal consolidation ambition, and reforms to lift trend growth).
• Dr Moolman is head of South African macroeconomic research at Standard Bank Group
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