Economics Weekly
Private sector credit extension slipped deeper into contraction territory, recording a decline of 1.8% y/y, from -1.5% y/y in March. We continue to see divergent trends between corporate and household credit: the decline is primarily due to corporate credit, which contracted sharply by 6.7% y/y, from a contraction of 5.2% y/y. By contrast, household credit extension continues an upward trend, growing by 4.7% y/y, from 3.3% y/y in the previous month. The divergent trends could be explained by the contrasting approaches to credit uptake employed by corporates and households in response to the pandemic. In anticipation of the pandemic-induced economic fallout, corporates drew down on their credit facilities last year, to boost their cashflow during the stringent lockdown. A corporate credit impulse ensued, which saw corporate credit peaking at 9.3% y/y in April last year. At the same time, household credit growth slowed, as consumers became more wary of taking up more debt, due to heightened uncertainty and job insecurity. Thus, the divergent trends reflect base effects, and how the two agents approached credit uptake in the first half of 2020.
In the household space, however, it is more than just a base effects story.
Households accumulating assets
In the second half of 2020, we notice divergent trends between household unsecured (consumption) credit and secured (asset-backed) credit. Households have been swapping consumption credit for asset-backed credit, signalling an element of asset accumulation, triggered by ultra-low interest rates combined with cheap assets in some instances. Note, however, that unsecured credit (general loans, credit cards and overdrafts) sprung back to positive territory in April, once again reflecting base effects. Month-on-month, it declined by 0.3%, and remains relatively low in level terms.
One market in which this is clear is residential property
Demand for mortgages and home buying activity rose to levels last in 2005-2007. Our Estate Agents Survey shows activity among agents is highest since 2005, while internal mortgage applications are highest since 2007, far exceeding initial expectations. There are a few reasons for this:
Implications
The asset accumulation drive combined with recent positive real house price growth suggests that consumers may emerge with replenished balance sheets. Encouragingly, the asset accumulation drive is across the price (and age) spectrum, although more prominent in the middle segments. Under normal circumstances, this would trigger wealth effects, i.e., spending induced by rising value of assets. In other words, under normal circumstances, we should expect the asset accumulation drive to provide cyclical support to spending on big-ticket items. In fact, data already shows a shift in household spending towards housing: less for travel and vacations, entertainment, and commuting, and more for housing, e.g., household furniture and appliances, mainly due to greater adoption of work-from-home. Nevertheless, we acknowledge that the overall shifts in spending patterns induced by the pandemic may limit this potential upside. For instance, demand for cars may be structurally lower post-pandemic, even with potential support from wealth effects.
Weekly highlights
Trade balance remained firmly in surplus territory
The trade balance remained in surplus at R51.2 billion in April, marginally narrower than the R52.6 billion surplus for March. In April, export values declined by 3.9% m/m while import values declined by 4.6% m/m. Due to a lower base in April 2020, export values grew strongly by 211% y/y while imports posted modest growth of 25.4% y/y. The sustained trade surplus alongside subdued import demand should still support the local currency from an external funding perspective. Strong export values should support company earnings and government revenue. The extent to which external demand support domestic economic growth rebound will largely depend on export volumes. At this stage, we expect production sectors of the economy and subsequently export volumes to drive economic growth this year. However, due to planned and unplanned maintenance of Eskom's power plants, we are cautious of the impact of rolling power supply disruptions on domestic production, which could limit export volumes.
South Africa's labour market slack persisted in 1Q21, jobless rate remains elevated
Stats SA's Quarterly Labour Force Survey (QLFS) data showed the economy lost 28 000 jobs in 1Q21 relative to 4Q20, while unemployment increased by 8 000 over the same period. Subsequently, the labour force declined by 20 000, resulting in the official unemployment rate of 32.6% compared to 32.5% in 4Q20 - i.e. official unemployment continued ticking up, reaching the highest level since 1Q1994.
We note that the momentum in the quarterly job gains in the last two quarters of 2020 slightly reversed in 1Q21. This is despite formal non-agricultural sector quarterly employment gain of 79 000. Worryingly, the level of employment was still 8.5% (or about 1.4 million), materially lower in 1Q21 relative to 1Q20, while unemployment was 2.5% (or about 172 000) higher over the corresponding period. The population not economically active, neither unemployed nor employed, was up by 11.6% (or about 1.8 million) in 1Q21 relative to 1Q20.
This reflects sustained slack in the labour market amid the profound and lingering impact of the pandemic. It also corroborates our view that employment gains are likely to be modest over the near to medium-term horizon due to the hysteresis nature (i.e. lagged response) of the labour market around the business cycle following an economic shock. The continued weakness in the labour market alongside the ongoing economic slack implies that labour unions' bargaining power will remain diluted and that aggregate labour income growth could be modestly constrained. This will have implications for the degree of the rebound in overall private household consumption expenditure growth. We note that some employees were still getting paid at reduced salaries in 1Q21, although this proportion was lower relative to 4Q20.
Manufacturing PMI still expansionary territory reflecting better operating business conditions
Seasonally adjusted manufacturing PMI rose to 58.3 points in May from 55.2 points in April and an average of 53.5 in 1Q21. This reflected an overall monthly improvement in manufacturers' operating business conditions. The new sales orders index (a proxy for demand) increased to 60.5 from 58.7, and, in response, the business activity index (a proxy for output) jumped to 58.8 from 50.8 in April. The inventories index accelerated to 61.4 in May from 55.3 points in April, indicating that manufacturers increased their stock in May more than they did in April. Indeed, manufacturers still expect improvement in business conditions over the near-term horizon, as reflected by their index for expected business conditions.
New vehicle sales up 45% YTD, recovering from a lower base in 2020
Total new vehicle sales volumes grew by 7.6% m/m in May after contracting by 17.6% m/m in April. Compared to May 2020, total new vehicle sales were up by 25 463 units to 38 337 in May 2021, reflecting a year-on-year growth rate of 197.8%. Year-to-date (January to May) total new vehicle sales are up by 44.9% compared to last year's corresponding period. However, due to the lingering impact of the pandemic, sales are still 38.3% below 2019 levels.
New passenger vehicle sales amounted to 24 122 units in May, reflecting an increase of 15 156 units from the 8 966 units recorded in May 2020. Interestingly, the vehicle rental industry accounted for 11.4% of passenger vehicle sales in May, up from 10.1% in April. This could imply that the rental industry is hopeful that tourism activity could improve as global vaccine rollout progress and/or that there is modest demand for people and businesses to rent cars for other activities unrelated to tourism. The prevailing uncertainty and the slack in the labour market could justify car renting over buying, particularly for consumers with a relatively unstable balance sheet.
The external environment continued supporting the domestic automotive industry, with vehicle exports at 35 326 in May, reflecting an increase of 23 425 units from relative to May last year. YTD new vehicle export sales are up by 67.2% compared to the corresponding period last year. They are, however, still down by 40.6% compared to 2019.
Overall, the domestic automotive industry is gradually recovering and should benefit from the anticipated domestic and global economic growth rebound. Although consumer confidence remains depressed and the unemployment rate is at an all-time high, historically low-interest rates should support vehicle sales performance. Production of vehicles is likely to be moderately interrupted by the shortage of semiconductors, while the recent acceleration in the new vehicle price index could partially impact sales. Nevertheless, the Naamsa CEOs confidence index reflects a continued improvement in business conditions faced by the automotive industry over the next six months.
Week ahead
On Tuesday, Stats SA will publish GDP data for 1Q21. Economic growth likely moderated in 1Q21 relative to 4Q20 but mostly likely avoided a double-dip recession. We expect seasonally adjusted real GDP to have posted growth of 0.6% q/q (2.4% q/q annualised) in 1Q21 from 1.5% q/q (6.3% q/q annualised) in 4Q20. Bloomberg consensus expectation is for real GDP to have posted annualised 3.6% q/q growth. Economic growth in 1Q21 was largely supported by the primary sector and the trade sector. Still, the economy's real GDP is likely to have been around 4.0% lower in 1Q21 relative to 1Q20.
On Wednesday, the BER will publish its business confidence survey results for 2Q21. In 1Q21, the business confidence index dropped to 35 points from 40 points in 4Q20. The 2Q21 business confidence result will give an idea of how businesses broadly view economic conditions. Idiosyncratic factors such as rolling electricity supply disruptions and slow rollout of vaccines relative to most other countries could limit improvement in business confidence.
On Thursday, the SARB will release the current account data for 1Q21. Bloomberg expectations are of the current account to have printed a surplus of R243 billion (4.6% of GDP), wider than the R198 billion (3.7% of GDP) in 4Q20. Most of the current account surplus would have come from the trade balance, which has benefited from solid export values amid higher terms of trade. In 1Q21, the non-seasonally adjusted (and not annualised) trade balance amounted to R96.2 billion.
Stats SA will also publish mining and manufacturing production data for April, which should give an idea of the economy performed at the beginning of the second quarter.
