Another Insipid Quarter for the South African Economy
• South Africa’s Growth: South African economic growth was erratic during the first three quarters of 2016, with even the relatively high growth recorded during the second quarter proving to be unsustainable as GDP growth rate dipped to only 0.2% in the third quarter. Furthermore, the third quarter of 2016 saw the global economy accelerating to 3.5%, with South Africa’s growth being seen as out of sync with general global economic conditions since other emerging market economies experienced an average growth rate of 4.7%. Current data indicates that monthly performance in industries such as manufacturing and mining has been disappointing, and given the overall muted confidence prior and during the fourth quarter of 2016, we do not expect much, if any, improvement in economic growth during the last quarter of 2016. Upon examining the above outcomes, our forecasted economic growth for 2016 is 0.3%.
• Business Confidence: Business confidence remains low, with the business confidence index staying in negative terrain since the first quarter of 2015. Again, the business confidence index tumbled by a further 4 index points during the fourth quarter of 2016, alluding to another quarter of unimpressive growth. The low business confidence is also evident in the low investment environment that resulted in gross fixed capital formation contracting during quarter three.
• The Consumer: Notwithstanding the tough economic milieu facing South African consumers that include amongst others, high inflation, high unemployment rates as well as relatively high interest rates, household demand continued to improve over the third quarter of 2016. In addition, consumer confidence also improved during the third quarter, but still remains in negative terrain.
• Inflation & Interest Rates: After a brief stint within the Reserve Bank target range during August 2016, headline consumer price inflation trended upwards from September through to November 2016, with food price inflation remaining the main culprit for higher inflation rates. In terms of interest rates, the Reserve Bank has been dovish since the MPC’s May 2016 meeting in attempt to not further stifle the country’s already muted economy. The Reserve Bank’s decision on interest rates later today will undoubtedly be one of the hardest since the financial crisis, and we expect them not to raise the repo rate in order to give economic recovery a fighting chance.
• The Fiscus: The country’s fiscal space worsened since the beginning of 2016 (when the Minister of Finance announced the government’s plans for fiscal consolidation) to the third quarter. This has mainly been due to the low growth economy that has resulted in less collected tax revenue. We do not expect improvement in the fiscal space over 2017.
• Exports, Imports and the Current Account: Exports contracted in line with lower production in the third quarter along with muted demand for South Africa’s products, with the lower demand mostly driven by the strengthening of the rand (especially given that global economic growth accelerated from the second quarter of 2016 to the second quarter, and commodity prices were also higher). Imports too declined over the period as a result of lowered activity in the country. Current data shows that the South African nominal effective exchange rate was higher during the months making up the fourth quarter than that of months in the preceding quarter, indicating that South Africa’s exports became even more expensive over the quarter relative to our main trading partners, and this could spell further bad news for the country’s export and the current account balance.
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