A Little Bit of Growth

Some Good News on Growth for South Africa…

This week the South African Reserve Bank decided to keep interest rates the same with the repo rate held at 7.0%. The Bank also said that we have reached the end of the cycle of interest rate increases... if their forecasts turn out to be correct.

The Bank has increased its 2016 growth forecast from zero percent to 0.4%. As we’ve pointed out recently, the South African population is growing at around 2%, so we need growth of greater than that amount to start generating jobs; but at least we’re heading in the right direction. The Bank has also nudged up growth forecasts for the next two years by 0.1 percentage points to 1.2% in 2016 and 1.6% in 2017.

This is particularly important because growth is a key criterion in the credit ratings agencies’ decision-making processes. Moody’s expects growth of 0.4% in 2016 and S&P is looking for 0.6%. Moody’s have SA 2 levels above junk status and announce their next update on 25th November. S&P and Fitch have SA only one level above junk and make their announcements in early December. This week Moody’s said that there was a less than 50% chance that they would downgrade SA. They also said that Pravin Gordhan was not sacred to SA’s rating and that they would look at his successor’s policies in the event that he was replaced.

The official economic outlook is “constrained” due to “weak domestic fixed investment and low levels of business and consumer confidence” and the data in our summary table is either mixed or negative.

Unofficially, our customers continue to see growth in orders, particularly in the residential and commercial construction sector in Gauteng. The mood is much better than it was at the beginning of the year, so my sense is that the economy is doing better than the official data suggests. 

Summary table of recent South African economic data

Summary table of recent South African economic data

Chart showing how the South African Reserve Bank's growth forecasts for 2016 and 2017 have changed over time

Chart showing how the South African Reserve Bank's growth forecasts for 2016 and 2017 have changed over time

…and a bit on Inflation


Inflation as measured by the Consumer Price Index (CPI) dropped from 6.3% in June to 6.0% in July and 5.9% in August. This is significant because it inflation is now finally within the Reserve Bank’s target range of 3-6%. The bad news for the majority of South Africans is that the on-going drought has pushed food inflation to a recent high of 11.6%. 

On the manufacturing side, producer price inflation increases from 6.5% in May to 6.8% in June and 7.4% in July. This is mainly because the producer price inflation for agricultural goods is a massive 20%.

Looking forward, inflation is expected to peak at 6.7% in the fourth quarter of this year (previous forecast 7.1%) before returning to the 3-6% target range starting in the second quarter of 2017. 
The improving outlook on inflation is important because it takes some of the pressure off the reserve bank to raise interest rates. 

What is your view on the South African economy based on your business and conversations with your clients? Share your thoughts on Facebook https://www.facebook.com/YouAndLouw/

(Sources: South African Reserve Bank, BusinessTech, Business Day)

DR ANDREW R LOUW CFA