The South African Economy Avoids a Recession but Continues to Struggle
South Africa’s Growth: The South African economy has entered a difficult period once again; the most recent major one was the 2008-09 global financial crisis. Risks to the outlook remain on the downside, with a myriad of unfavorable conditions facing the economy. The country, however, narrowly escaped a recession during the third quarter of 2015. Against this backdrop, we forecast a further marginal pickup during the fourth quarter of 2015 due to a more stable electricity supply. The country’s export performance has also improved on the back of a weak exchange rate.
Demand: The country is facing broad-based subdued demand. Growth in household consumption expenditure is generally on a downward trend, a testament to the headwinds currently facing South African households. This is unlikely to change in the near future as consumers are faced with higher interest rates given that the Reserve Bank increased the repo rate for the second time in 2015 during the month of November. In addition, the latest statistics from the Reserve Bank show a deceleration in credit growth to the private sector for “instalment sales”.
Business conditions: Business confidence continued to tumble during this period, and the cumulative fall in business confidence over the six months in the second and third quarters of 2015 has brought confidence to its lowest level since the end of 2011. Manufacturing PMI remains under the neutral 50-point mark. Notwithstanding, manufacturing was the best performing industry during the third quarter of 2015, and we expect this to remain so – at least in the short run – in the absence of load-shedding,along with the prevailing weak rand. Dampened local demand is, however, expected to continue impacting business negatively; for example, the latest retail sales shows a deceleration in growth from 4% (during August) to 2.7% (during September).
Employment: Unemployment in the third quarter of 2015 was at 25.5%, an increase from 25% in the second quarter. Manufacturing, the fourth largest sector, not only grew the most and added the most to GDP growth during Q3 2015, but also grew employment by 1.1% year on year and 1.0% quarter on quarter during this period. Unemployment is not showing signs of abating; furthermore, businesses, especially in the manufacturing sector have eluded the possibility of cutting employment in the coming 12 months.
Inflation & Interest Rates: After remaining unchanged during both August and September 2015, the headline consumer inflation rate increased on a year-on-year basis in October to a record 4.7% from 4.6%. We expect inflation to continue rising, especially on the back of rising food prices, which make up 14.20% of the overall CPI basket. The SARB’s Monetary Policy Committee increased the South African benchmark interest rate, the repo, by 25 basis points during its final meeting of 2015, held on November 19, bringing it to 6.25%. We expect monetary policy to continue with gradual policy normalization in 2016 as it did over 2015, especially with inflation expected to breach the upper end of the target range in early 2016, while lackluster economic growth will cause the MPC to do so with caution, hence the expected gradual normalization.
Fiscal Space: The country’s fiscal balance as a percentage of GDP is in negative terrain while at the same time the debt-to-GDP ratio has been rising. The government has indicated its intentions for fiscal consolidation. However, new expenditure items along with old ones that are proving difficult to contain (e.g. the government wage bill) will make this difficult.
Exchange Rate, Exports and Commodities: The South African exchange rate remains weak and volatile. We expect this to continue well into 2016 due to the country’s deteriorating terms of trade.An upside to the country’s weakened exchange rate is that exports have been resilient despite unfavorable commodity prices. The end to the commodity price boom, along with the deceleration in China’s economic growth, highlights the need for South Africa to further diversify its exports, including beneficiation of some of the commodities that the country is exporting.
Current Account: The current account deficit has been shrinking. The trade balance has been benefiting from the weakened exchange rate, and we expect this to continue to have a positive effect on the current account, and result in a further reduction in the deficit, at least in the short term.
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