SA GDP growth improves, but is well behind EM peers

Our weekly podcast by Kevin Lings:

SA GDP growth surprises a little on the upside, but needs much more impetus

In this podcast, STANLIB’s Chief Economist, Kevin Lings, discusses SA’s GDP numbers for Q1, which surprised a little to the upside, and expectations of what economic growth could look like for the rest of the year. He looks at sectoral contributions and notes that manufacturing remains a weak spot in the economy, as manufacturing production also declined, and stresses the need to be closer to other emerging markets at 4% on a sustained basis. He also discusses US inflation (CPI and PPI) for May and the relatively high headline inflation (against a 2% inflation target) as gasoline prices soar. He also discusses the Fed’s meeting this week and pressure on the new Fed chair to cut interest rates.

The focus areas during the week included:

The S&P 500 equity index gained 0.6% in a volatile week, helped by a possible US-Iran agreement and declining oil prices, which offset mixed inflation data and volatility in AI-related stocks. News reports suggested that a US-Iran deal, which would enable a reopening of the Strait of Hormuz, could be signed on the sidelines of the G7 summit in France this week.

The highly anticipated initial public offering (IPO) of rocket and satellite company SpaceX was also a major focus as it completed the largest IPO on record on Friday. SpaceX shares surged in their first day of trading following a record-breaking $75bn IPO that was more than four times subscribed by institutional and retail investors. The stock climbed as high as 31% above its offering price before falling back later in the session, closing around 18% up over the session. Over the day, trading was brisk, with $64bn worth of SpaceX stock changing hands. The SpaceX IPO will likely set the stage for large offerings from OpenAI and Anthropic later this year.

The STOXX Europe 600 Index ended the week up 1.7%, while Japan’s stock markets declined, with the Nikkei 225 index falling 0.9% and the broader TOPIX Index down 1.7%. The losses were partly offset by a sharp rally at the end of the week as US President Donald Trump pulled back threatened military strikes. The SA All Share Index gained 1.3% in the week, boosted by a 3.6% surge in the Financial 15 Index and a 1.8% rise in the Industrial 25 Index.

The US bond market generated positive returns in the week, with yields declining across most maturities, particularly on Thursday as reports that the US had cancelled planned strikes on Iran led to a broader improvement in sentiment. After ending the prior week at 4.55%, the yield on the benchmark 10-year US government bond dropped to 4.48% on Friday afternoon.

Global monetary policy is in focus with the Bank of Canada leaving its policy rate unchanged, while the European Central Bank increased rates by 25bps as expected, taking the deposit rate to 2.25%. This week brings decisions from the Bank of Japan, Bank of England, Reserve Bank of Australia, Sweden’s Riksbank, Brazil’s central bank, the Norges Bank, the Swiss National Bank and Federal Reserve. The Fed and BoE are expected to stay on hold, while the BoJ is expected to raise its policy rate by 0.25% to 1% as Japan continues to show signs of emerging from decades of sluggish growth and deflation. At the Fed, this week’s meeting will be Kevin Warsh’s first as chair and will include an updated set of economic projections. Warsh is likely to adopt a cautious approach to the policy outlook, signalling that interest rates are effectively on hold.

The rand continues to outperform its emerging market peers year to date, gaining 1.7% against the US dollar against 0.7% for the emerging market currency index. The rand's response to developments in the US-Iran conflict has been relatively muted, with markets awaiting clearer direction. However, renewed optimism around a potential agreement to reopen the Strait of Hormuz supported risk sentiment on Friday, with the rand gaining 1.3% on the day. While current levels may be sustained if geopolitical optimism persists, further significant gains appear unlikely without stronger domestic support.

US CPI rose by 0.5%m/m in May, down from 0.6%m/m in April and in line with market expectations. Critically, gasoline prices increased by 7.0% in the month, pushing the annual increase to 40.5%. Interestingly, over the past three weeks, US gasoline prices have declined by almost 10%, pulling the annual rate of increase down to 32%, suggesting that gasoline inflation peaked in May. On an annual basis, US consumer inflation is now up at 4.2%, its highest annual rate of increase in more than three years. In contrast, core CPI rose by a modest 0.2% m/m, which is down from 0.4% m/m in April and below market expectations for an increase of 0.3% m/m. This suggests that underlying consumer inflation remains relatively well contained, considering the recent sharp and sustained increase in energy prices, although at 2.9% y/y, core inflation remains well above the Fed’s inflation target of 2%.

US PPI inflation rose by 1.1% m/m in May above market estimates for an increase of 0.7%m/m. This pushed the annual rate of PPI inflation up to 6.5% y/y, compared with 5.7% in April – and the highest reading since November 2022. Energy prices rose by almost 11% in the month, with the annual rate of energy inflation increasing to approximately 37%y/y. Looking beyond energy, underlying inflationary pressures remained evident, with core PPI up at 4.9% y/y. The Fed is expected to remove the easing bias from next week’s FOMC policy statement, reflecting increased upside risks to inflation, but is very unlikely to consider hiking rates, especially since the latest consumer inflation data suggests that inflationary pressures outside of energy remained relatively contained in May.

According to ADP, the US private sector added an average of 29 000 jobs per week for the four weeks ending 23 May, down modestly from 30 500 in the prior report. This reading appears consistent with other recent indicators suggesting that the US labour market is characterised by slower hiring but limited layoffs. While the pace of job creation remains subdued by historical standards, it appears sufficient to support near-full employment, particularly as labour-force growth slows due to tighter immigration enforcement and an ageing workforce. For the Fed, this backdrop suggests that its maximum-employment mandate is largely being met. With the unemployment rate contained at 4.3% and 7.6 million job openings exceeding unemployment of 7.3 million, policymakers are likely to remain focused on inflation in the near term.

US weekly jobless claims for unemployment benefits (in the week ended 6 June) rose to 229 000, up from 225 000 in the prior week and the highest reading since early February. Initial claims have now increased for three consecutive weeks. Continuing claims rose to 1.795 million, an increase of 24 000 from the prior week’s revised level.

The University of Michigan reported that its Index of Consumer Sentiment rose to 48.9 in June, up 4.1 index points from May, which was partially driven by lower gasoline prices early in the month. The report noted that consumers’ views on personal finances and business conditions improved, but that overall, “views of the economy are still relatively dour,” largely due to inflation worries. Consumers’ expectations for inflation in the year ahead declined modestly but remained elevated at 4.6%.

The US Department of Defense expanded its list of Chinese companies that it says have ties to China’s military, adding several high-profile companies including Alibaba Group, Baidu, BYD, WuXi AppTec, Unitree Robotics, Yangtze Memory Technologies, and ChangXin Memory Technologies. While the designation does not impose broad sanctions, it restricts US defense procurement involving the named companies and may increase regulatory and reputational scrutiny.

In the first quarter of 2026, SA GDP grew by 0.5% quarter-on-quarter (seasonally adjusted, but non-annualised). This compares with an increase of 0.4% in the final quarter of 2025. The market expectation was for an increase of 0.3% q/q. The quarterly growth performance was relatively broad-based with almost all the main economic sectors making a positive contribution, especially the financial and business services sectors (which contributed 0.2 percentage points to the overall GDP performance), as well as retail trade (0.1 percentage point) and transport/communication (0.1 percentage point). In contrast, the contraction in manufacturing output deducted 0.1 percentage point. SA’s economic performance continues to be heavily dominated by consumption-type activity rather than manufacturing, mining and construction. This imbalance, which partly reflects the consequences of SA’s weakened and neglected infrastructure, limits the country’s potential growth rate and will need to be resolved if the economy is to achieve a GDP growth rate that is consistently above 3%. Over the past year, the economy expanded by a much more encouraging 1.9%, which is up from 0.8%y/y in Q4 2025. However, the large fuel price increases in April, May, and June, coupled with higher inflation and a 25bps increase in interest rates during May, will likely start to weigh on SA’s economic performance for the remainder of the year.

In April 2026, SA manufacturing production declined by a very disappointing 2.7% m/m, signalling a bad start to the second quarter after a contraction in Q1 2026 and two years of recession in 2024 and 2025. The consensus expectation was for a monthly increase of 1.2% m/m. Over the past year, production declined by a substantial 2.9%. This all highlights that the sector is struggling to gain any momentum as it has been unable to achieve a consistent increase in output each month. Instead, one or two months of positive growth tend to be followed by a couple of months of negative performance, resulting in a stagnant to weak performance overall. SA manufacturing activity is now 9.5% below the level of output achieved two years ago and 8.7% below the level recorded prior to the start of COVID-19 in 2020.

In April 2026, SA’s mining production rose by 3.3% m/m, after a revised decline of 4.8% m/m in March. On a yearly basis, mining production increased by a very welcome 8.2% y/y, which is up from 2.5% y/y in March and much higher than market expectations of 3.5%y/y (Bloomberg). There were mixed performances in the month, with only five of the 12 mineral groups recording annual increases in production and the remaining seven recording decreases. The largest positive contributors were PGMs, manganese ore, and chromium ore. Despite the surge in activity during April, the underlying performance in the mining sector remains erratic and weak overall. In fact, mining production is still 8.2% below the level that prevailed in January 2020, prior to the COVID-19 outbreak.

President Cyril Ramaphosa has launched an urgent court application aimed at stopping the impeachment inquiry from proceeding in Parliament. The application seeks an order preventing the National Assembly and its impeachment committee from commencing proceedings while a separate review application is still before the courts. The court is now expected to determine whether the inquiry should be paused pending the outcome of the broader review case.

The European Central Bank (ECB) increased its policy interest rate by 25 basis points to 2.25%, in line with expectations. It also increased its main refinancing operations rate as well as its marginal lending facility by the same amount, to 2.40% and 2.65% respectively. At a press conference following the decision, ECB president Christine Lagarde said the council had reached the decision unanimously, and that it had been endorsed by the bank’s chief economist. “We did not discuss or debate any other alternative proposals,” she said. The main reason for the increase in rates was the fact that headline inflation in the euro-area has risen to 3.2%, largely due to energy prices increasing by 10.9% y/y. Core inflation remains relatively contained at 2.5% y/y. Lagarde indicated that the decision was “not a forceful decision”, but one that put the ECB in a position to navigate uncertainty and potential future developments. The ECB has also revised up its inflation forecast for 2026 from 2.6% (back in March) to 3.0%. Lagarde said the upward revision was due to a higher energy price path, which was expected to feed into food, goods and services inflation. At the same time, the euro-area GDP growth forecast for 2026 has been revised modestly lower from 0.9% to 0.8%. Lagarde explained that the downward revision reflected the bank’s view that the Iran war would have a more pronounced impact on commodity markets and confidence than it had previously envisaged. Lastly, Lagarde highlighted uncertainty surrounding the economic outlook. “The full implications of the war for medium-term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second-round effects,” she said.

China’s headline consumer inflation rate remained unchanged at 1.2% y/y in May, which was below market expectations for inflation to accelerate to 1.3% y/y (Bloomberg). This suggests that weak domestic demand conditions are preventing higher producer prices being passed through to the consumer. In fact, on a monthly basis, Chinese consumer prices fell by 0.1% m/m, following a rise of 0.3%m/m in April. China’s headline inflation rate has been below the People’s Bank of China’s (PBoC) implicit target of 2.0% for over three years.

China’s producer inflation was recorded at 3.9% y/y in May, the highest annual rate of increase since July 2022. This was, however, in line with market expectations. Despite the surge in factory-gate prices, producer prices for consumer goods remained in deflation for the third consecutive month, coming in at -0.8%y/y in May, suggesting that companies are finding it hard to fully pass on higher costs to customers as overall domestic demand remains fragile.

China’s trade balance recorded a surplus of $105.43bn in May 2026, above market expectations for a surplus of $92.30bn (Bloomberg) and up from $84.82bn in April. The acceleration in the trade surplus in May was boosted by a surge in exports while imports fell for the first time since October 2025. The growth in exports, which was led by a strong 50.0% y/y acceleration in shipments of high-tech products in May, suggests that rampant demand for AI infrastructure continues to outweigh the negative effects of the energy shock. In other words, the May trade data continues to ease concerns that the Iran war will take a toll on Chinese exports. Instead, it further highlights increasing linkages between the current global tech and AI cycle and trade flows, particularly in Asia. Imports continued their strong double-digit growth in May amid strong AI hardware demand, higher prices, and some base effects.

Japan’s corporate goods price index (PPI) rose by 6.3% y/y in May 2026, well ahead of market expectations of an increase of 5.6% and up from April’s reading of 5.3%. The petroleum and coal products, utilities, chemicals, and nonferrous metals segments led the gains. In particular, import prices surged 25.5%y/y, up from a revised 21.0% in April.

Japan’s first-quarter 2026 GDP growth estimate was revised down, with the economy expanding at an annualised rate of 1.8% compared to a preliminary estimate of 2.1%. This is still ahead of initial market expectations for growth of 1.3%.