REPORTS

Stats Flash

PMI Jumps Back to the Contraction Side in May

After bouncing back to the expansionary territory (50.9 points) in April 2018, the ABSA’s seasonally adjusted Purchasing Manager’s Index (PMI) fell marginally to 49.8 index points in May 2018. Between January and May 2018, the index followed a yo-yo movement (with a contraction followed by an expansion). See Graph 1. The dip in the latest PMI was due to more than half the categories edging lower, with “new sales orders” (51.5 points in May 2018 vs. 65.5 points in April 2018), “expected business conditions” (65.3 points in May 2018 vs. 69.6 points in April 2018) and “purchasing commitments” (45 points in May 2018 vs. 48 points in April 2018) losing the most points.

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Headline and Core Inflation on Par Again

According to IRESS Consensus, headline and core inflation were both expected to marginally inch higher in May 2018 (4.6% y/y). However, both these edged lower, recording growth rates of 4.4% y/y, following growth rates of 4.5% y/y (each) in April 2018. This marks the second consecutive month that headline and core inflation equated. See Graph 1.

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Retail Sales Slow in April 2018

In the first quarter of 2018, Statistics SA reported that the tertiary sector picked up slightly, despite “trade” contracting and thereby contributing negatively towards the first quarter 2018 GDP growth. In fact, retail trade sales slowed in the first month of the second quarter of 2018 (0.5% y/y), after increasing by 4.6% y/y (previously 4.8% y/y) in March 2018. See Diagram 1. According to IRESS, there was a general market expectation for sales to record a 4.3% y/y growth. In April 2018, fifty-seven percent of the total categories recorded negative growth rates compared to the hundred percent positive growth rates recorded in March 2018. This led to today’s contained results. “General dealers” (-1% y/y), “food, beverages & tobacco” (-5.5% y/y), “textiles & clothing” (-0.5% y/y) and “hardware” (-0.9% y/y) were the categories that declined. These weigh a total of seventy-seven percent to total retail sales. See Table 1.

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Market Brief

South Africa’s GDP starts off another year with a contraction

Just as we had anticipated and communicated in our previous report, South Africa’s GDP contracted in the first quarter of 2018. The annualized percentage change in the seasonally adjusted quarterly GDP came in at -2.2% in the first quarter following 3.1% in the fourth quarter of 2017. Besides the economy’s shaky start in what is supposed to be its take-off year, perhaps also interesting is the trend in quarterly GDP contractions in the past few years. Graph 1 shows a contraction in South Africa’s quarterly GDP once every year since 2014, with all these contractions taking place in the first quarter (except in 2015 when it occurred in the second quarter). So far, however, there appears to be no discernible pattern in any sector where the seasonal performance could be attributed to this.

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A weakening of South Africa’s terms of trade results in a significant deterioration of the current account in the first quarter of 2018

There was a marked widening of the deficit on the current account of the balance of payments from 2.9% of GDP in the fourth quarter of 2017 to 4.8% of GDP in the first quarter of 2018. This was largely due to the deterioration of the trade account during the period; South Africa’s trade balance went from a sizeable surplus of R74 billion to a significant deficit of R25 billion. Even though the shortfall on the services, income and current transfer account narrowed during the first quarter of 2018 to R-204 billion from R-211 billion, this was significantly less than the widening in the trade account. As such the balance on the current account deteriorated from R-137 billion to R-229 billion in the first quarter of 2018.

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Quarterly Report

New ANC President Cyril Ramaphosa Injects Some Optimism into the South African Economy Summary and Assumpt ions

South Africa’s Growth: The South African economy has managed to grow at a relatively decent rate (2.0%) during the third quarter of 2017, following the surprise 2.8% growth in the second. Generally, however, the country’s economic growth has been stuck in low gear, averaging only 2.1% over the past ten years and only 1.6% over the past five years. We forecast a GDP growth rate of 0.7% for 2017.

Confidence and Investment: Low confidence has prevailed for years in South Africa. As a result, investment has been falling short of the 30% of GDP prescribed in the National Development Plan (NDP) policy document. Gross fixed capital formation averaged 3.1% over the past ten years, and only 2% over the past five years, with the implications of this evident in the GDP growth rate that also declined over the period. During quarter three of 2017, gross fixed capital formation grew at 4.3%, a seemingly impressive growth rate, except for the fact that it was emerging from a low base of -2% in the second quarter. We expect recovery in confidence (and investment) following Cyril Ramaphosa’s victory as the President of the ANC, depending on his ability to prove that the ANC under his leadership can deliver on promises of sound policies and their implementation.

Economic Sectors: The supply side of the economy saw 6 out of its 10 main industries growing positively over the third quarter of 2017. Like the previous quarter, most of the growth came on the back of a robust primary sector, followed by the secondary sector, while the tertiary sector lagged. We expect the tertiary sector to recover in 2018 as confidence returns.

Households: Domestic final demand moderated from 2.7% in the second quarter of 2017 to 2.3% in the third quarter. This came about as, amongst others, growth in final consumption expenditure by households declined, going from 4.7% to 2.6%. However, real disposable household income increased over the third quarter, albeit at a slower rate than in the second quarter, while household cost of servicing debt as a percentage of disposable income declined over the period due to the July interest rate cuts. Also, inflation and interest rates are lower, hence we expect another positive growth in final household consumption expenditure over the fourth quarter of 2017.

Inflation & Interest Rates: South Africa’s headline consumer inflation decelerated to 4.6% y/y during November 2017 from 4.8% y/y in October – which was also a deceleration from September’s 5.1% y/y. The inflation rate has therefore stayed within the Reserve Bank’s 3-6% target band since eight consecutive months. South Africa’s base interest rate, the repo rate, is currently at 6.75% and the prime interest rate is 10.25%. Tomorrow’s will be one of the more challenging decisions for the MPC, but we foresee them taking a bold move and cutting the repo rate by 25 basis points.

The Fiscus: The country’s fiscal balance has been deteriorating. Government debt (as a percentage of GDP) is rising, with estimates revised up from the 2017 main Budget during the Medium-Term Budget Policy Statement.

Current Account: The deficit on the South African current account declined from 2.4% to 2.3% during the third quarter. Although the South African exchange rate strengthened from mid-December 2017, it was still weak for most of the fourth quarter, and this will have supported South African export by making them relatively cheaper. Because of this, and the robust global economy, we expect another trade surplus and a contained current account deficit during the last quarter of 2017.

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Political Economy Note

President Ramaphosa’s 2019 State of the Nation Address: Growth, Government Reform, and Job Creation Emphasized

President Ramaphosa delivered his second State of the Nation Address (SONA) with a blend of honesty and hope. He acknowledged the setbacks experienced in a number of areas. He highlighted the considerable harm to the country resulting from corruption, especially arising from “state capture” in the form of financial losses to the state, hollowing out of the balance sheet of state-owned-enterprises, and the loss of confidence in the institutions of governance.

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Special Report

Land Expropriation without Compensation in South Africa: A Chronological Update

It was during its 54th National Elective Conference in December 2017 (ANC 54) at Nasrec, the same conference that resulted in the election of Cyril Ramaphosa as the new President of the organization, that the ruling African National Conference (ANC) also elected to pursue land expropriation without compensation as a policy option. The ANC, however, made it clear that it would ensure that this policy would not be at the detriment of future investment in the economy, cause harm to the country’s agricultural production and food security, nor undermine other sectors of the economy.

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