FNBS Economics weekly review


Weekly highlights

New vehicle sales end 2019 on an encouraging note

  • New vehicle sales ended the year on a high note, recording a welcomed uptick of 4.2% y/y in December after a 5.8% y/y decline in November. Nevertheless, the 2019 volumes declined by 2.7% compared to the previous year.
  • Downbeat sales in the industry continue to be reflective of an unwillingness by consumers to spend on big-ticket items amid a deterioration in their financial position. The prevailing market conditions are characterised by consumers consolidating their car purchases, as evidenced by the rising proportion of SUVs (family-oriented cars).
  • New vehicle sales prospects are therefore unlikely to show a material improvement in the foreseeable future against the backdrop of a sluggish economic climate, low real disposable income growth and subdued confidence levels.

Absa Purchasing Managers’ Index edges lower in December

  • The Absa Purchasing Managers’ Index (PMI) ended the year on a slightly lower note at 47.1 points, from 47.7 in November. This December print rests about one point below the average for 2019, which falls below the neutral 50-point mark.
  • In all, 2019 proved to be a challenging year for the manufacturing sector as activity came under pressure. There was broad-based weakness among the underlying components, with the biggest dips evident in the business activity and new sales order indices. The business activity component fell to its lowest level since 2017, following a drop in demand and the return of load-shedding in December. The new sales order index rested at its lowest level for 2019, which was partly a result of weaker external demand.
  • Although there was an uptick in employment, the index remained below the neutral 50-point mark, implying continued job losses in the sector. As for the pick-up in the inventories index, it reached its best level since July. However, at the current level, inventories are well in excess of new sales orders, which bodes ill for manufacturing production at the start of 2020.
  • Looking ahead, the index tracking expected business conditions in six months’ time deteriorated to 45.9 points. We assess that the combination of load-shedding and poor export demand prospects likely soured sentiment.

Manufacturing production contracts for the sixth straight month

  • According to Stats SA, manufacturing production contracted by 3.6% y/y in November 2019 from -0.8% in October. This outcome was worse than the Bloomberg consensus of -1.3% y/y and it came on the back of negative growth rates among nine of the ten manufacturing divisions.
  • The biggest detractors from the annual headline number were wood, paper, publishing and printing (-1.1 percentage points [ppt]); motor vehicles, parts and accessories and other transport equipment (-0.8ppt); petroleum, chemical products, rubber and plastic products (-0.6ppt); textiles, clothing, leather and footwear (-0.4ppt); and basic iron and steel, non-ferrous metal products, metal products and machinery (-0.4ppt). The only positive contribution came from food and beverages, where production increased by 1.3% y/y and contributed 0.4 ppt.
  • On a monthly and seasonally adjusted basis, factory output contracted by 1.5%, following a recovery of 2.5% m/m in October.

Week ahead

Consumer confidence to remain weak in 4Q19

After holding firm amid a year of very weak economic growth and rising unemployment rates, the FNB/BER Consumer Confidence Index (CCI) finally slumped deep into negative territory in 3Q19, recording -7 index points from +5 in the previous quarter. We expect the CCI to have remained in negative territory in 4Q19. We anticipate factors such as the deterioration in government finances (with a possibility of further tax hikes, as ventilated in the October mini-budget statement), as well as the unexpected episodes of load-shedding in December to have adversely impacted consumer sentiment in 4Q19.

November retail sales likely to tick up

Retail sales have continued to reflect a weak demand environment, having moderated further to a mere 0.3% y/y in October 2019, from 0.4% y/y in September (revised from 0.2%). A combination of weak disposable income growth (via weak labour markets) and fragile consumer sentiment is weighing on demand. Under these conditions, consumers have become more price-sensitive and are more inclined to buy goods on special. As such, we expect volumes to have picked up in November, as consumers took advantage of discounted pricing during Black Friday sales.

Mining production to remain lacklustre in November

Mining production contracted by 2.9% y/y in October 2019, following a slump in the mining of diamonds, platinum group metals and manganese ore. We expect a weak outcome for November against the backdrop of intermittent power outages during the month and weak momentum in external demand.

SARB likely to err on the side of caution

At their last MPC meeting the SARB decided to keep the repo rate unchanged at 6.5%, leaving the prime lending rate at 10%. Regarding next week’s decision, we assess the odds for a rate cut to have risen. Since the last MPC meeting, the rand exchange rate has strengthened, while growth and inflation have surprised to the downside. We therefore expect the SARB to adjust its forecasts accordingly and to have lower starting points. Nevertheless, the SARB is likely to err on the side of caution and keep rates unchanged, given domestic event risks (upcoming February 2020 budget and Moody’s ratings decision) and renewed risks on the global front (US-Iran tensions).