Economic Recovery was Indeed Derailed and Confidence Remains Low
• South Africa’s Growth: Economic Growth was more than disappointing during the first quarter of 2017 as GDP contracted by 0.7% following a prior contraction of 0.3% in the final quarter of 2016. This means South Africa entered into a technical recession during the first quarter of 2017, the first recession since the 2008/09 financial crisis. Consistently negative political developments have become the norm in the current Zuma administration and have reached the point where they have put the country’s economy and economic growth under serious strain. We forecast a growth rate of 0.5% for 2017.
• The Manufacturing Sector: Manufacturing declined by 3.7%, contributing -0.5 percentage points to the first quarter GDP performance. Although PMI stayed above the 50-neutral mark during the 2017 first quarter months (after staying in the contraction territory for two consecutive quarters at the end of 2016), it plunged to 44.7 points in the first month of the second quarter, the worst performance since the beginning of 2016. Production activity in the sector will continue to be hampered by weak domestic demand and the persistent low business confidence.
• Business Confidence: The business confidence index, which collapsed by 11 points from 40 index points during the first quarter of 2017 to 29 index points during the second quarter, continues to be weighed by the tumulus political climate, as well as consistently weak business activity.
• The Consumer: Final household consumption expenditure contracted during the first quarter of 2017. Household disposable income has been adversely affected by the poorly performing economy and also contracted during the period. This came about as prices increased at a faster pace than the nominal disposable income of households during the quarter. In a positive turn of events, consumer price inflation decelerated rather significantly from April 2017 and this will alleviate the pressure on household disposable income. However, since household consumption expenditure is closely related to consumer confidence, and with consumer confidence bound to remain low due to a myriad of reasons including high unemployment, fiscal contraction, and low investment levels we expect consumer demand to remain muted. Hence, consumption expenditure by households will fail to meaningfully contribute towards GDP growth for some time to come.
• Exchange Rate, Inflation & Interest Rates: The Reserve Bank has maintained a repo rate of 7% since early 2016. South Africa’s inflation finally reverted back into the Reserve Bank’s target range of 3-6% in April 2017 when it decelerated to 5.3% y/y from 6.1% in March 2017. This marked deceleration in consumer prices resulted from the significant moderating of food prices, the contained pricing power of domestic firms as a result of weak domestic demand, as well as the overall appreciation of the rand from early 2016. An upside risk to the inflation rate lies in the high possibility of a marked rand depreciation due to political and economic headwinds.
• The Fiscus: The muted growth environment is exerting pressure on South Africa’s fiscal stance. We expect the country’s GDP growth to fall short of the 1.3% that was forecasted by the National Treasury at the beginning of 2017, with this placing considerable downside risk to the country’s tax revenue, which then places the Treasury’s plans for fiscal consolidation at a serious risk.
• Current Account: The deficit on the South African current account balance widened from 1.7% as a percentage of GDP in the final quarter of 2016 to 2.1% of GDP in the first quarter of 2017.
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