Publications
Partners
Cape Town - The third quarter will be weaker than the second quarter on numerous indicators including growth and external balances, according to Peter Attard Montalto, emerging markets economist at Nomura.
"We think the core narrative is negative per capita growth and a lack of continued developmental momentum which is rating negative. We also look at the CPI rejig that will occur next year, but it is too early to draw any firm conclusions," said Montalto.
He pointed out that the SA Reserve Bank's Monetary Policy Committee (MPC) recently said that, "while the second quarter growth performance was more favourable…this improvement is unlikely to be sustained in the third quarter”.
In Montalto's view this goes to the heart of the current market narrative on South Africa.
"Through the summer especially the market has built up a narrative of a turnaround in South Africa’s outlook and the positives that flow from that. The second quarter was strong for high frequency data and gross domestic product (GDP) and the current account deficit, which narrowed," he said.
"This jarred with views of a weak overall 2016 forecast for growth and the current account, and so we explain why we expect data to turn more negative through the third quarter – indeed it is already evident in the high frequency data – the latest PSCE credit growth and trade data especially."
He pointed out that the slowdown in credit growth has been quite marked, led especially by corporate lending, which traditionally has been strong.
READ: Zuma likely to embark on containment strategy - economist
"We expect this to be reflected in the slower pace of domestic private sector investment growth and slower pace of investment growth in the rest of Africa. We think household credit growth will remain low below CPI growth as consumers slowly deliver and the credit spectrum is generally saturated, where banks want to be doing business in risk terms," said Montalto.
"We expect further negativity in labour growth in the third quarter, though it is likely to be offset by employment for the municipal elections. However, this should be reversed in December, when we see a much lower-than-normal seasonal gain in employment."
He added that the more important labour market story remains that employment growth is not strong enough for entrants into the labour market each year. The next batch to arrive after graduation in the first is a particular point to watch, in his view.
READ: Markets may see Zuma as weak now, but this won’t last - analyst
"This means we envisage roughly zero quarterly growth in the third quarter and a dip slightly lower in year-on-year growth compared to the second quarter (0.6% to 0.4%). We see growth recovering slightly into the first quarter of 2017, but again highlight it is negative per capita income growth," said Montalto.
He still forecasts growth at 0.5% for the full year this year and 1.4% - with strong downside risks - for next year.
"The heart of the issue is South Africa is suffering from poor competitiveness and a negative TFP (productivity shock), which is structural. The economy does respond to a weaker currency, but non-linear and in unusual ways compared to its peers," said Montalto.
"In our forecast we expect negative per capita income growth until 2019 with negative jobs growth this year and only minimal jobs growth next year. This is not an outlook to get excited about in terms of credit risks and again we reiterate the market has overplayed the ‘off the bottom’ narrative for the economy."
"The true fiscal position has performed very well in this environment, but the situation and lack of fiscal flexibility builds medium-run credit risks.
"We can only really say that when private sector investment growth shows some dynamism. Negative per capita income growth is not ‘off the bottom’," he added.
Read Fin24's top stories trending on Twitter: Fin24’s top stories
