Will fading Ramaphoria compromise South Africa’s growth recovery?

SOUTH AFRICA - Forecast 18 Jul 2018 by Iraj Abedian

---

Summary and Assumptions
• South Africa’s growth: Real GDP contracted markedly in the first quarter of 2018 following a surprise 3.1% increase in the fourth quarter of 2017 and GDP growth above 2% for three consecutive quarters (since quarter 2 2017). Although there was a marked improvement in the business confidence index in the first quarter, it deteriorated in the second quarter, erasing about half the gains made in the first quarter. This, and the still flagging investment rates leaves our forecast of GDP for 2018 at around 1.5% despite more optimistic forecasts, including from the National Treasury, in the recent past.
• The supply side of the economy: Agriculture production went down significantly in the first quarter, and we do not expect the sector to add significantly towards GDP growth in the current year simply because of 2017’s high base due to record harvests during that year. Both mining and manufacturing production surprised on the upside in May, and even though both had contracted in April, export values of both will be supported by the depreciated rand and healthy global demand.
• Households: Despite the improved consumer confidence index, the overall economic situation for consumers had not really improved. It has actually worsened in some cases. For instance, during the first quarter, growth in real disposable income decelerated, the ratio of household debt to nominal disposable income also inched higher, and unemployment remains high. Consumers facing a higher tax burden and the price of fuel has been escalating.
• The rand, inflation & interest rates: The rand has been depreciating and is likely to remain weakened due to muted market sentiments and monetary policy normalization particularly in the US. Inflation has generally been rising and inflationary pressures remain, therefore the Reserve Bank is unlikely to cut interest rates tomorrow, and we expect the repo rate to remain at 6.5%
• The fiscus: The SA fiscus is in a poor shape. Growth in total government expenditure outstripped revenue growth during the 2017/18 financial year. Even though the new administration is cleaning house at the SA Revenue Service, robust economic growth is still the main factor that will result in a healthy fiscus.
• Current account: The deficit on the current account widened during the first quarter of 2018, but we expect it to narrow slightly in the second quarter as we also forecast a surplus in the country’s trade balance.