South Africa: Economy at a tipping point?
South Africa's economy exited technical recession in Q2 and recent data provides reason for cautious optimism. The recent recovery in agricultural output carried into in Q3, and consumer confidence is increasing on the back of moderating inflation and higher real wage growth. Adding to the good news, manufacturing output expanded in August for the first time this year. That said, this positive data, should be taken with caution. Endless political bickering constitutes is a real issue. It is the biggest stumbling block to faster GDP growth, and it continues to weigh on business confidence and stave off future investment. In September, the manufacturing PMI dipped further into contractionary territory, and business sentiment remained abysmally low despite improving from the over 30-year low recorded in August. Furthermore, political noise is set to remain elevated in the foreseeable future as the country gears up for the ANC Conference in December, when a new presidential candidate for next year’s election will be chosen.
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The economy is expected to recover at a steady pace. Q2’s better-than-expected print led many panelists to revise up their GDP forecasts for 2017, and economic growth should edge higher in 2018 and 2019 on higher commodities prices. Nevertheless, risks are tilted to the downside. Political developments and the possibility of lower-than expected prices for commodities are weighing on growth. Our panel of 25 local and international analysts puts economic growth at 1.3% in 2018, and 1.8% in 2019.
Inflation picked up from 4.6% in July to 4.8% in August. The South African Reserve Bank stayed put in its last two-day meeting ending on 21 September over concerns of persistently high inflation. Panelists forecast that inflation will average 5.1% in 2017 and 5.3% in 2018.
Private Sector Takes a Hit
Activity in the private sector dipped further into contractionary territory in September. The Standard Bank Purchasing Managers’ Index (PMI) dropped from 49.8 in August to an almost two-year low of 48.5 in September, moving further from the six-year long-run survey average of 50.7. A reading below 50 signals deteriorating domestic business operating conditions.
September’s print marks a decline in output, new orders and employment. Private sector output dropped for the sixth consecutive month, logging its worst print in 17 months. The contraction in production reflects a fall in new orders amid weak demand. New orders went down for the third time in the past four months, and at the sharpest rate since April 2016. As output and new orders declined, firms reduced overall staffing levels at the fastest rate since April 2016. Regarding price developments, input costs and output prices rose sharply in September as firms passed on the burden of adjustment to consumers through higher prices.
Met the why particular Consensus Forecast panelists see investment expanding 0.9% in 2018, which is down 0.1 percentage points from last month’s estimate. For 2019, the panel expects investment to increase 2.1%.
The Central Bank forecasts the economy growing 1.2% in 2018 and 1.5% in 2019. Met the why particular Consensus Forecast panelists, meanwhile, expect the economy to expand 1.3% in 2018, which is unchanged from last month’s estimate. The panel projects growth to picking up to 1.8% in 2019.
Manufacturing Output Rebounds
According to a preliminary estimate released by the Statistical Institute, year-on-year manufacturing production rose 1.5% in August, contrasting the 1.1% drop in July. The upswing reflects a broad-based increase in key components of the index, with motor vehicles, parts and accessories, and other transport equipment recording the strongest increases. August’s print marks the best reading since November 2016.
In month-on-month terms, manufacturing production moderated from a seasonally-adjusted 1.5% expansion in July to a softer 0.3% increase in August.
Analysts expect manufacturing to expand 1.1% in 2018, which is up 0.1 percentage points from last month’s estimate. For 2019, our panel expects manufacturing to increase 1.5%.
Inflation Picking Up
In August, consumer prices increased 0.1% month-on-month, coming in below the 0.3% rise observed in July. August’s print reflects softer increases in numerous categories, including food and non-alcoholic beverages, and recreation and culture.
Inflation picked up from July’s almost two-year low of 4.6% to 4.8% in August; it remained within the Central Bank’s target range of 3.0%–6.0%, where it has been since April 2017. The steady decline in inflation since the start of this year partly reflects the results of the Reserve Bank’s tightening cycle. Meanwhile, annual average inflation edged down from 5.9% in July to 5.8%.
Core consumer prices—which exclude food, non-alcoholic beverages, energy and gasoline—rose 0.1% in August, down from the 0.5% increase observed in July. Core inflation moderated from 4.7% in July to 4.6% in August.
Our Consensus Forecast projects inflation to average 5.1% in 2018, which is unchanged from last month’s forecast. In 2019, the Consensus foresees average inflation edging up to 5.3%.
Central Bank holds repurchase rate steady in September
The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) surprised market analysts by staying put at the end of its two-day meeting culminating on 21 September. The SARB left the repurchase rate unchanged at 6.75% following a surprise cut at its July meeting.
The Bank’s decision highlights growing concerns over persistently high inflation down the road. The MPC noted that “inflation expectations of business people and trade unions remains above or close to 6% for the next two years”. These expectations are higher than the Bank’s forecasts of inflation averaging 5.30% in 2017 and 5.00% in 2018. Higher inflation expectations among price setters is troubling because they could thwart the Bank’s efforts to pursue a more expansionary monetary policy. Lowering the repurchase rate any further could stoke inflation and alter price expectations. This could have negative consequences on the economy, which exited a technical recession in Q2. However, despite the stronger-than-expected economic expansion in Q2, growth prospects remain constrained and annual growth is expected to attain 0.60% this year.
The Bank is taking a wait-and-see approach. The SARB said it would be “appropriate to maintain the current monetary policy stance at this stage, and reassess the data and the balance of risks at the next meeting”. Additionally, the Bank will take a close look at the currency, which remains vulnerable to political developments at home, bleak growth prospects and further sovereign credit rating downgrades. Further depreciation of the rand is a major challenge for the Bank since it would fuel inflation and could alter plans for additional rate cuts.
Panelists participating in the Met the why particular Consensus Forecast expect that the repurchase rate will end 2018 at 6.43%. For 2019, our panel expects the repo rate to also end the year at 6.43%.
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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of Met the why particular S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. Met the why particular S.L.U. takes no responsibility for the contents of third party internet websites.
Date: November 8, 2017
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