Political developments once again dominated the South African economic landscape in the first quarter of the year, with revelations on ‘state capture’ and the Constitutional Court ruling opening national and ruling-party debate over whether the president should serve out his second term of office. Markets progressively took the news as positive, with the rand’s rally outpacing other emerging and commodity currencies. Besides the difficult political and policy environment, the country is also battling the worst drought in 23 years (although there has been some relief in certain areas), low commodity prices, a structure of high and rising costs that is hurting industry and rising interest rates.
Recent statistics paint a mixed picture of the general state of the economy, but the overall trend seems weaker. The annual decline in mining production deepened in February. The latest manufacturing figures reflect a rebound in growth, but this followed a weak number in January, and the pace of decline in annual vehicle sales also quickened in February. Retail sales growth remained robust in the first two months of the year, but this pace is unlikely to continue given high debt levels, static employment and tight financial conditions faced by households.
Our growth forecast for 2016 remains at 0,2% from 1,3% in 2015, which is still below market consensus. Since January the National Treasury, Reserve Bank and International Monetary Fund (IMF) have all adjusted their growth forecasts for 2016 to below 1%. The Reserve Bank expects growth to average 0,8% and 1,4% in 2016 and 2017 respectively from forecasts of 0,9% and 1,6% previously. National Treasury forecasts growth of 0,9% and 1,7% for 2016 and 2017 respectively compared with 1,7% and 2,6% at the time of the Medium Term Budget Policy Statement in October last year. The IMF expects growth of 0,6% and 1,2% for 2016 and 2017 respectively from forecasts of 0,7% and 1,2% previously.
Inflation jumped to 7,0% in February from 6,2% in January, surprising the market and introducing the possibility that inflation might peak much higher than most analysts had expected. However, the March inflation number was a softer 6,3% – the result of a decline in the petrol price – and points to a peak much later in the year and similar to what was expected before the February release. The biggest threat to the inflation outlook remains the impact of the drought on food prices. Grain SA estimates that 1,71 million tonnes of maize had to be imported during the 2015/16 season (1,6 million tonnes of yellow maize and 110 000 tonnes of white maize) and 3,8 million tonnes (2,7 million yellow and 1,1 million white) will have to be imported during the 2016/17 season. While recent rand strength (if sustained) might help contain the increase in food prices much later in the year, grain contracts for at least the next six months might have already been concluded in less favourable circumstances. We expect inflation to soften further in April and to hover just above the 6% upper target range for a few months before a more pronounced acceleration in prices takes hold (from the third quarter onwards) when the effects of the drought and a weak rand increase food prices significantly. We expect inflation to end the year well above 7%.
The current surge in inflation has been caused mainly by exogenous factors, but the increases in rates undertaken by the Reserve Bank since January are designed to mitigate any second-round inflationary effects. The Bank’s decision to hike the repo rate by 25 basis points in March, instead of by 50 basis points as was seen in January, sends the right signal on the inflation front while limiting the negative impact on economic growth. With inflation expected to remain above 6% for most of the year, the Reserve Bank will probably continue tightening policy. We forecast two more rate hikes of 25 basis points each at the July and September meetings of the Reserve Bank’s monetary policy committee. We do not anticipate an increase at the May meeting, as we believe the recent strength in the rand will persuade the Bank to keep rates temporarily on hold. ‘By Busisiwe Radebe, Economist at Nedbank’
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