A Not-So-Firm Recovery Due to Political Economy Uncertainties
• South Africa’s Growth: South Africa’s end-2016 – beginning-2017 technical recession came to a welcoming end during the second quarter of 2017 as the seasonally adjusted and annualized GDP recorded a growth rate of 2.5% q/q. We expect a positive quarterly GDP growth rate once again during the third quarter of 2017 due to improved commodity prices from their moderation during the second quarter, along with a continued good performance of the agriculture sector. Furthermore, the contained inflation should continue to benefit consumers.
• Agriculture: Agriculture’s impressive growth since the beginning of 2017 is the result of the recovery in the sector due to improved rainfall. The sector had contracted significantly during 2016, but started recovering in the first quarter of 2017, and continued to grow meaningfully during the second quarter, becoming the highest contributor towards overall GDP growth.
• Business Confidence: Business confidence picked up during the third quarter of 2017, rising by six points to 35 index points. Nevertheless, this is still very low. During the third quarter, almost seven out of ten (of the survey respondents) reported still being dissatisfied with prevailing business conditions – an outcome indicating that investment will remain depressed for some time.
• Households: Final household consumption rallied during the second quarter of 2017 to record a growth rate of 4.7% q/q following -2.7% in the first quarter. Nonetheless, the country’s unemployment rate remained at 27.7% between the first and second quarter of 2017 - with the still very high unemployment rate likely to bear heavily on consumer confidence.
• Exchange Rate, Inflation & Interest Rates: The average consumer prices quickened in August 2017 as headline CPI registered 4.8% y/y from 4.6% y/y in July. However, food price inflation continued its deceleration trend. The slight acceleration in the August 2017 inflation rate was caused by prices rising in “transport” as well as “alcoholic beverages and tobacco”. The international price of oil that has been rising, combined with the weakening rand, are expected to add significant upward pressure on inflation in the immediate future. We therefore do not expect the Reserve Bank to cut interest rates in November – particularly since there are substantial risks to the inflation outlook in the form of the upcoming credit ratings announcements and the ANC elective conference.
• The Fiscus: Evidence so far indicates that government is having difficulty raising revenue, and this is due to low economic growth. As such, the failure to raise adequate revenue poses danger to government’s effort to stabilize debt. Chances are that later in the month, when Minister Finance unveils his first Medium Term Budget Policy Statement, the fiscal indicators will be revised materially unfavourably.
• Current Account: Following a price decline in a number of South Africa’s export commodities in the second quarter, many of these prices rallied during the third quarter. It is for this reason, along with the fact that global economic growth has been rising (mostly on the back of growing) that we expect the trade account to record another surplus during the third quarter of 2017.
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