The composite leading business cycle indicator in South Africa fell by 2.5% from a month earlier in July of 2021, following a revised 4.4 % drop in the previous month. Nine of the ten available component time series decreased, while one increased. The leading indicator leads economic activity by around six months and provides insight into expected future economic and business conditions. The largest detractors were decelerations in the six-month smoothed growth rate of job advertisement space and the number of new passenger vehicles sold. The positive contributor was the increase in the number of residential building plans approved. Although better than expected GDP growth is forecast for 2021, fixed investment in South Africa remains low which will have a negative impact on sustained economic growth. This combined with the July events and the Covid-19 pandemic is likely to have a lasting effect on investor confidence and job creation, hampering a recovery in labour-intensive sectors hardest hit by the lockdowns. Policy settings in advanced economies remain accommodative, although the spread of the Delta variant, higher global inflation, and uncertainty about the normalisation path for interest rates continue to cause financial market turmoil and capital flow volatility.

Consumer inflation, as measured by the consumer price index (CPI), came in at 4.9% year-on-year in August, up from 4.6% recorded in July. This was in line with the consensus and marks the fourth consecutive month that inflation was above 4.5% (the midpoint of the SARB’s target). The main contributors to the 4.9% annual inflation rate were food and non-alcoholic beverages (up 6.9%), housing and utilities (up 3.8%), transport (9.9%) and miscellaneous goods and services (up 4.2%). Core inflation increased to 3.1% year-on-year though in contrast, the consensus forecast had been for it to remain unchanged at 3%. The SARB’s latest inflation forecasts indicate no significant change in the inflation outlook. Forecasts for the headline inflation rate in 2021 were revised up, from 4.3% year-on-year to 4.4%, and remained unchanged at 4.2% in 2022 and 4.5% in 2023. The SARB noted that the risks to the short-term inflation outlook are assessed to the upside. Rapid global producer price and food price inflation have surprised to the upside in recent months and could do so again. Oil prices have become more volatile in recent weeks and could rise beyond expectations. Electricity and other administered prices also continue to present short-term risks. In the medium to long term, a weaker currency, higher domestic import tariffs, and escalating wage demands present further longer-term upside risks to the inflation forecast.

The South African Reserve Bank (SARB) kept the repo rate unchanged at 3.50% with the prime lending rate remaining at 7%. The latest Monetary Policy Committee (MPC) meeting was the seventh consecutive meeting at which monetary policy settings have been left unchanged, following 275bp of cumulative cuts since the onset of the coronavirus crisis. With the inflation outlook and inflation expectations well anchored around the SARB’s midpoint of 4.5% policymakers are expected to be in no rush to increase rates. However, the SARB’s Quarterly Projection Model (QPM) indicates an increase of 25 basis points in the fourth quarter of 2021 and further increases in each quarter of 2022 and 2023. On the economic growth front, the SARB expects the economy to grow by an upwardly revised 5.3% this year (up from 4.2%), 1.7% in 2022, (down from 2.3%) and by 1.8% in 2023 (down from 2.4%). Overall, and after revisions, the risks to the medium-term domestic growth outlook are assessed to be balanced, as most of the bounce back from the recovery is now in the past. Looking ahead, economic and financial conditions are expected to remain volatile for the foreseeable future. On the positive side, the SARB governor highlighted that, relative to the US Fed taper tantrum episode in 2013, South Africa was now better prepared for the start of monetary policy normalisation in the US. The implication was that the SARB does not necessarily have to slavishly follow developments in the US. SARB governor, Lesetja Kganyago mentioned South Africa’s large current account surplus, domestic fiscal consolidation, and lower inflation (relative to 2013) as key factors that should help SA weather the expected rise in US interest rates.