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September 2024 Economic Review

| Market Forces

US inflation data subsided and unemployment data was also positive, prompting the US Federal Reserve (Fed) to begin its interest rate cutting cycle. China’s central bank unveiled measures to improve the country’s economic growth by lowering borrowing costs and allowing banks to increase their lending capabilities. China will also raise its retirement age from 1 January 2025. South Africa’s inflation rate dropped below the midpoint target in August, encouraging the South African Reserve Bank (SARB) to cut interest rates for the first time since pre-Covid.

US cuts interest rates for the first time in four years

The US Fed cut interest rates by 50 basis points (bps) in September for the first time in four years, taking the benchmark rate to the 4.75%-5.00% range. The Fed’s decision to lower its benchmark federal funds rate marks a significant turning point in its battle against inflation. Fed Chair Jerome Powell declared last month that “the time has come” for action. This allowed the central bank to step back from its aggressive bid to cool its economy and reduce inflation. Powell said the move was meant to show policymakers’ commitment to keeping unemployment low as inflation eases.

August’s headline inflation reading was 2.5% y/y, its lowest level since February 2021. Although the Consumer Price Index (CPI) has not yet reached the Fed’s 2% target, Powell said inflation was closer to the Fed’s objective and it was more confident that inflation was moving sustainably towards the target. As the labour market has cooled, raising fears of a broader economic slowdown, the Fed has faced mounting pressure to make the move.

Source: Bureau of Labour Statistics, LSEG, September 2024

When asked whether the central bank was playing catch-up with other global central banks, and responding to weaker data on the jobs market, Powell said he didn’t think the Fed was behind. He believed the cut was made in a timely manner.

The Fed hiked rates at 11 consecutive meetings in 2022 and 2023, and then held them at between 5.25% and 5.50% for more than a year, in an effort to pull price growth back down to its target. Policymakers at the Fed also forecast a further 50 bps rate cut by the end of 2024, 100 bps by the end of 2025 and 50 bps by the end of 2026 according to the World Economic Forum.

China’s economic stimulus measures

China’s central bank has unveiled a major package of measures aimed at reviving the country’s flagging economy. People’s Bank of China (PBoC) Governor Pan Gongsheng announced plans to lower borrowing costs and allow banks to increase their lending. The move comes after a series of disappointing data releases showing rising expectations in recent months that the world’s second-largest economy will miss its own 5% growth target for 2024.

Speaking at a news conference alongside officials from two other financial regulators, Governor Gongsheng said the central bank would cut the amount of cash banks have to hold in reserve – known as reserve requirement ratios (RRR). The RRR will initially be cut by half a percentage point, in a move expected to free up about one trillion yuan (equivalent to US$142 billion and £106 billion).

Gongsheng added that another cut may be made later in the year. Other measures to boost China’s crisis-hit property market include cutting interest rates for existing mortgages and lowering minimum down payments on all types of homes to 15%.

The country’s real estate industry has been struggling with a sharp downturn since 2021. Several developers have collapsed, leaving large numbers of unsold homes and unfinished building projects. The PBoC’s new economic stimulus measures come just days after the US Fed lowered interest rates.  The plans included measures to help support the stock market. The news pushed up share prices, with the leading stock indices in Shanghai and Hong Kong ending the day more than 4% higher.

For your interest:

  1. Two-pot retirement numbers
  • The South African Revenue Service (SARS) received 161 607 tax directive applications from 1-10 September 2024, with 98.9% (159 853) related to Savings Withdrawal Benefits. This averages 17 964 applications per day.
  • Alexforbes processed over 78 000 withdrawal claims in the first week of the new system, equivalent to six months’ worth of claims before the new legislation. These withdrawals total R1.5 billion, with an estimated R270 million in taxes.
  • In its first two days, Old Mutual’s two-pot WhatsApp channel was used by 190 000 clients.
  • Sanlam’s Corporate client call centre handled 5 500 two-pot withdrawal requests in the first two days.
  • Metropolitan’s two-pot chatbot function was accessed by more than 11 400 clients, who completed eligibility requests in the first three days.
  • Momentum Group received 79 081 withdrawal applications by 10 September 2024.
  • Of the R950 million applied for at Momentum Group, 82% was paid to applicants, with 18% going to SARS. The group processed and paid these amounts from September.

(Sources: SARS, Moneyweb, BusinessTech, BusinessLive, Citywire, September 2024)

  1. BoE holds interest rates steady
  • The Bank of England (BoE) held interest rates at 5% and said it would be cautious about future cuts. The Monetary Policy Committee voted 8-1 to keep rates on hold.
  • BoE Governor Andrew Bailey struck a more cautious tone as wage growth seemed set to remain too high for comfort and policymakers remained divided over how quickly longer-term inflation pressures were fading.

(Source: WEF, BusinessLive, September 2024)

  1. China raises retirement age
  • China’s retirement age is among the lowest in the world. However, it plans to gradually increase its retirement age for the first time since 1950, as the country faces a dwindling pension budget and an ageing population.
  • The retirement age for men will rise from 60 to 63, for women in blue-collar jobs from 50 to 55, and for women in white-collar jobs from 55 to 58. The change will start from 1 January 2025 and retiring before the statutory age will not be allowed.

(Source: BBC News, September 2024)

  1. Gold price surge
  • South Africa struggled to benefit from the recent surge in gold prices, which have increased by over 30% in 2024 due to global economic uncertainties. Despite the boom, the country’s mining sector faces significant structural challenges, such as unreliable power supply and rising operational costs, which hinder its ability to fully capitalise on these prices.
  • While rising gold prices have allowed producers to maintain production levels by sustaining marginal deposits, overall production has increased only marginally. The demand for gold, driven by geopolitical tensions and economic uncertainties, has boosted the market for Krugerrands, with more consumers seeking to diversify their investment portfolios. However, without addressing its structural challenges, South Africa risks missing out on the full benefits of the gold price surge.

(Source: Mail & Guardian, September 2024)

South Africa sticks to modest interest rate cut despite US Fed move

The SARB’s Monetary Policy Committee (MPC) broke the four-year hiatus, reducing the repo rate by 25 bps to 8% year-on-year (y/y), which brings the prime lending rate down to 11.5%. The SARB’s decision comes amid a global trend of monetary easing, with the US Fed and the European Central Bank also cutting rates in September. This move has sparked a debate on the future trajectory of interest rates in South Africa. Economists are divided on whether this will lead to a slow, steady decline in rates or a more aggressive, front-loaded approach.

Source: SARB, September 2024

Lower borrowing costs could stimulate economic activity by making loans and mortgages more affordable for consumers and businesses. The property industry, for instance, has welcomed the move, noting that it will make home loans more affordable. However, the SARB’s quarterly projection model suggests that further rate cuts may be limited, with a terminal rate of 7.17% expected by 2025. This cautious approach reflects ongoing concerns about inflation and economic stability.

Despite the positive reception, there are concerns about the long-term implications of this rate cut. The debate continues whether the SARB will prioritise controlling inflation or supporting economic growth and employment. With inflation easing and economic growth becoming a more significant focus, the SARB’s future decisions are likely to be influenced by these dual mandates. The ongoing discussions among economists and policymakers will shape the trajectory of interest rates in the coming months. South Africa’s headline inflation slowed for a third consecutive month, cooling to 4.4% y/y in August from 4.6% y/y in July. This is the lowest inflation print since April 2021 when the rate was also 4.4% y/y.

Macro overview

Global overview

Developed market (DM) equities continued their strong run. The MSCI World Index ended the month positively, gaining 1.83% month-on-month (m/m), leaving the global equity benchmark up, with only two negative months in the past year. The US Fed was a key catalyst driving investor optimism in September. The Fed cited some early signs of weakness in the US labour market as the motivation for easing monetary conditions. Emerging markets benefited from improved investor sentiment and the MSCI Emerging Markets (EM) Index was the best performer ending positively at 6.72% m/m. Global bonds and global property ended positively at 1.70% and 3.15% m/m respectively (in dollars). The FTSE Index was negative at -1.29% m/m in pounds, while the S&P 500 was in positive territory at 2.14% m/m in dollars. The Dow Jones Index ended the month positively at 1.96% m/m in dollars, the Euro Stoxx 50 was positive at 0.93% m/m in euros, and the Nikkei was negative for the month at -1.30% in yen terms, due to concerns over economic growth in Japan.

Local overview

South African equities continued their post-election rally into September, as the FTSE/JSE All Share Index posted positive gains of 4.04% m/m in rand terms. Resources and Financials were positive for the month at 3.89% and 2.46% m/m respectively, but Industrials ended negatively at -0.04% m/m. Property was the best performer in the local market at 5.04% m/m. Cash was also in positive territory for the month at 0.67%. The bond market was positive, as the FTSE/JSE All Bond Index gained 3.86% m/m. Bonds of 1-3 years gained 1.11% m/m, bonds of 3-7 years gained 2.45% m/m, bonds of 7-12 years gained 4.09% m/m, and bonds of 12 years and above gained 5.37% m/m. The rand strengthened against the US dollar, euro and pound by 3.03% m/m, 2.19% m/m and 0.95% m/m respectively.

 

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