The South African economy poised for revival

SOUTH AFRICA - Forecast 25 Jan 2019 by Iraj Abedian

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Summary and assumptions
• South Africa’s growth: South Africa started 2018 on a high note and full of renewed optimism but ended the year with a more muted tone following another year of insipid economic metrics. GDP growth disappointed in H1 2018 but recovered in Q3 with 2.2% GDP growth. We expect another positive growth rate in Q4 2018, and an overall 0.8% GDP growth rate for 2018. Investment has been improving, particularly FDI, and this, along with other economic stimulus initiatives, will lead to improved growth in 2019.
• Manufacturing: Manufacturing output grew positively during both October and November 2018. Also, the PMI finally moved into expansionary territory in December 2018. We therefore expect the manufacturing sector to add positively towards GDP during Q4 2018.
• Households: Domestic demand rebounded in the third quarter of 2018. Real final household consumption recovered in Q3, and monthly retail sales increased in October and November 2018, respectively. These, along with the fact that there has only been one quarterly contraction in real final household expenditure since 2010, lead us to expect an increase in this metric in the fourth quarter of 2018.
• Employment: December 2018’s PMI revealed what could possibly be an early effect of SA’s Minimum Wage Act. The employment sub-index of the PMI deteriorated, falling deeper into the contraction territory, and indicating that manufacturers expect to employ fewer people. The value for December was also the lowest recorded since 2014. Hence, from the results, we expect employment in the manufacturing sector to suffer in the near term.
• The rand, inflation & interest rates: Consumer inflation moderated to 4.5% y/y - the Reserve Bank’s inflation target range’s mid-point in December 2018. This was following an interest rate hike of 25 basis points in November. Our inflation outlook has improved, and we expect the Reserve Bank to leave interest rates unchanged in March 2019, and possibly until the post-May 2019 national elections.
• Fiscus: There has been a slippage in fiscal projections mainly as the result of the low-growth environment and the resultant revenue shortfalls. South Africa has higher levels of debt as well as a larger budget deficit. The upcoming 2019 Budget to be presented by the Finance Minister on February 20 is important and will reveal whether or not the fiscus will make a positive turnaround. Moody’s will also likely give its assessment of SA’s sovereign credit following the Budget presentation.