International background and outlook
The focus remains on monetary policy as global inflation continues to moderate at a slow pace while underlying growth momentum is subAEdued. Global growth continued to edge modestly higher in Q2 2024, albeit with some divergences among countries and regions. Economic activity in advanced economies remains driven by solid services demand, with manufacturing also expanding but at a significantly softer pace. In emerging market economies, activity has been led by both services and manufacturing, with countries such as India posting strong growth due to robust domestic and external demand. The global growth outlook remains steady for 2024 and 2025, with the risks assessed as balanced. Despite some upward deviations during the quarter, global disinflation has continued, with headline inflation easing sustainably in most economies. However, strong services activity has kept core inflation sticky in most countries. As a result, some central banks face a conundrum: keeping rates elevated for too long will eventually weigh on growth outcomes, while cutting prematurely could revive inflation.
Domestic background and outlook
Economic activity contracted in Q1 2024, pressured by continued load-shedding, and weaker global and domestic demand. Early indications suggest that domestic activity improved slightly in Q2. Producers and exporters benefited from reduced load-shedding and marginal improvements in rail and port services. However, the financial pressure on consumers intensified, as elevated inflation and sharply higher interest rates eroded household incomes and weighed down confidence. These mixed conditions are likely to persist for much of 2024, keeping the economy in a relatively stagnant state, but the cycle should start to turn towards the end of the year. Exports are expected to recover later in the year as global demand lifts and commodity prices improve. At the same time, receding domestic inflation should help bolster real household incomes and prompt the South African Reserve Bank (SARB) to start reducing interest rates, which should enable a modest recovery in consumer spending. In contrast, fixed investment growth is likely to decline off last year’s high base as private firms trim capital outlays and cut costs to restore profitability. The downside will be limited by continued outlays on renewable energy capacity. Growth in government consumption expenditure will be subdued given ongoing fiscal consolidation. Altogether, real GDP is forecast to grow at a slightly faster pace of around 0.9% in 2024. Against this backdrop of sluggish domestic demand, inflation is forecast to ease further, but only slowly, reaching SARB’s 4.5% target on a sustainable basis around the second half of 2025. The upside risks to the inflation outlook stem from threats posed by the ongoing geopolitical conflicts, and the rand’s underlying vulnerability to any abrupt shifts in risk sentiment driven by changing US interest rate expectations. We expect SARB’s Monetary Policy Committee (MPC) to start cutting rates in September, followed by another reduction in November, taking the prime rate to 11.25% by the end of 2024.