New ANC President Cyril Ramaphosa injects some optimism into the South African economy
South Africa’s Growth: The South African economy has managed to grow at a relatively decent rate (2.0%) during the third quarter of 2017, following the surprise 2.8% growth in the second. Generally, however, the country’s economic growth has been stuck in low gear, averaging only 2.1% over the past ten years and only 1.6% over the past five years. We forecast a GDP growth rate of 0.7% for 2017.
Confidence and Investment: Low confidence has prevailed for years in South Africa. As a result, investment has been falling short of the 30% of GDP prescribed in the National Development Plan (NDP) policy document. Gross fixed capital formation averaged 3.1% over the past ten years, and only 2% over the past five years, with the implications of this evident in the GDP growth rate that also declined over the period. During quarter three of 2017, gross fixed capital formation grew at 4.3%, a seemingly impressive growth rate, except for the fact that it was emerging from a low base of -2% in the second quarter. We expect recovery in confidence (and investment) following Cyril Ramaphosa’s victory as the President of the ANC, depending on his ability to prove that the ANC under his leadership can deliver on promises of sound policies and their implementation.
Economic Sectors: The supply side of the economy saw 6 out of its 10 main industries growing positively over the third quarter of 2017. Like the previous quarter, most of the growth came on the back of a robust primary sector, followed by the secondary sector, while the tertiary sector lagged. We expect the tertiary sector to recover in 2018 as confidence returns.
Households: Domestic final demand moderated from 2.7% in the second quarter of 2017 to 2.3% in the third quarter. This came about as, amongst others, growth in final consumption expenditure by households declined, going from 4.7% to 2.6%. However, real disposable household income increased over the third quarter, albeit at a slower rate than in the second quarter, while household cost of servicing debt as a percentage of disposable income declined over the period due to the July interest rate cuts. Also, inflation and interest rates are lower, hence we expect another positive growth in final household consumption expenditure over the fourth quarter of 2017.
Inflation & Interest Rates: South Africa’s headline consumer inflation decelerated to 4.6% y/y during November 2017 from 4.8% y/y in October – which was also a deceleration from September’s 5.1% y/y. The inflation rate has therefore stayed within the Reserve Bank’s 3-6% target band since eight consecutive months. South Africa’s base interest rate, the repo rate, is currently at 6.75% and the prime interest rate is 10.25%. Tomorrow’s will be one of the more challenging decisions for the MPC, but we foresee them taking a bold move and cutting the repo rate by 25 basis points.
The Fiscus: South Africa’s fiscal balance has been deteriorating. Government debt (as a percentage of GDP) is rising, with estimates revised up from the 2017 main Budget during the Medium-Term Budget Policy Statement.
Current Account: The deficit on the South African current account declined from 2.4% to 2.3% during the third quarter. Although the South African exchange rate strengthened from mid-December 2017, it was still weak for most of the fourth quarter, and this will have supported South African export by making them relatively cheaper. Because of this, and the robust global economy, we expect another trade surplus and a contained current account deficit during the last quarter of 2017.
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