South Africa’s producer price index (PPI) for final manufactured goods fell into deflation in October, marking its first decline in a decade and signalling a potential slowdown in headline consumer price inflation. While this decline is positive for inflation dynamics, intermediate producer price inflation has bottomed out, suggesting limited room for further moderation in both PPI and CPI price pressures. Additionally, November’s domestic fuel price hikes, driven by higher Brent crude prices and a weaker rand, may reverse disinflationary pressures due to base effects. These factors limit the scope for an acceleration of monetary easing by the SARB in the months ahead, with a gradual rate-cut trajectory still the base case.
Yesterday’s other publication, the SARB’s Financial Stability Review, highlighted South Africa’s deteriorating infrastructure as a significant threat to financial stability. In particular, years of underinvestment and poor maintenance have led to significant financial pressure on municipalities that could impact creditors in the financial sector and potentially require government bailouts, increasing fiscal stress. Despite these challenges, recent developments offer some optimism. The formation of a coalition government after the May elections has improved sentiment, with a focus on repairing critical infrastructure. Additionally, the suspension of power cuts, signs of fiscal consolidation, and an improved sovereign credit outlook have contributed to a more positive financial stability outlook.
Today, trade balance data for October will headline a data card that also includes money supply and monthly budget statistics. Recall that SA’s trade surplus widened to +R12.8bn in September from a revised reading of +R5.1bn in August. The increased surplus was a result of increased exports and a decline in exports, complementing each other. The trade balance has now remained in a surplus for eight consecutive months, a welcome outcome for the still-struggling South African economy. These surpluses support economic growth and help offset the government’s weak fiscal position, albeit marginally. Looking ahead, a strong ZAR and improving consumer financial position could begin to work against the trade balance in the coming months via higher consumer and capital goods imports.