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GDP growth: Expect rate hike now in January

Sep 06 2016 20:25
Carin Smith

Cape Town - Nedbank's economic unit said on Tuesday that it now anticipates one more interest rate hike of 25 basis points by the SA Reserve Bank (Sarb) - in January 2017.

This is in reaction to Statistics SA announcing on Tuesday that South Africa's real gross domestic product (GDP) grew by a seasonally adjusted annualised 3.3% quarter-on-quarter (q-o-q) in the second quarter. However, the economy grew by only 0.6% y-o-y in the second quarter and an equally sluggish 0.3% y-o-y in the first half of this year.

The Nedbank unit pointed out that the GDP improvement in the second quarter was heavily influenced by the first quarter's very low base when a 1.2% contraction was recorded.

"The improvement in economic activity over the second quarter was widely anticipated, but few expect this pace to be sustained over the next 12 to 18 months," said Nedbank.

First National Bank (FNB) said in reaction to the GDP numbers that household expenditure remains weak, growing just 1% q-o-q, and the third quarter of 2016 GDP number is unlikely to be half as good.

"That said, 2016 GDP growth could well surprise to the upside, but may still not be enough to avert a sovereign downgrade," cautioned FNB.

READ: SA staves off technical recession, economy grows 3.3% in Q2

Bigger question

In the view of Nedbank, the bigger question for Sarb is whether the highly vulnerable rand will be able to withstand changes in investor sentiment. It foresees this change in investor sentiment likely to flow from "the persistent threat to National Treasury, the general deterioration in the political landscape, the risk of further sovereign risk rating downgrades come December and possible unexpected changes in US monetary policy".

Nedbank expects Sarb to err on the side of caution.   

"Government has no room to manoeuvre, given the need to reduce the budget deficit and contain the rise in government debt. On balance, the economy is likely to grow by about 0.2% in 2016, before expanding modestly by around 1% in 2017," said Nedbank.

"The outlook remains murky. On the output side, the prospects for agriculture are uncertain and heavily reliant on good rains in the upcoming summer."

FNB said the impact of the prolonged drought remains evident, with agriculture contracting –0.8% - the sixth consecutive quarterly pullback. In its view the agriculture sector, however, appears to be turning the corner.

The Nedbank economic unit foresees some improvement off a low base likely in mining and manufacturing, even though it expects the upside will still be contained by patchy global demand, relatively low global commodity prices, rising domestic production costs and limited economic infrastructure.

READ: Rand rallies as SA sidesteps recession


Growth in expenditure on GDP rebounded to 3.4% q-o-q in the second quarter following a 1.2% contraction in the first. The rise was driven by household and government consumption expenditure, which increased by 1% and 1.3% respectively, as well as exports, which grew by 18.1% over the quarter. These offset a sharp decline in gross fixed capital formation, which fell by 4.6%.

"On the expenditure side, restructuring will probably continue in the private sector given the global dynamics and domestic uncertainties, limiting fixed investment and job creation," said Nedbank.

"Consequently, household confidence and spending are likely to remain subdued, hurt by the strain on disposable income, relatively high debt service costs, a stagnant job market and persistent political turmoil."

The main boost in the second quarter came from growth in value added by manufacturing (up 8.1% q-o-q), mining (up 11.8%), finance, real estate and business services (up 2.9%), transport and communication services (up 2.9%) as well as the broader domestic trade, catering and accommodation industries (up 1.4%).

Sanisha Packirisamy, economist of MMI Investments and Savings, said according to Deutsche Bank, the surge in mining production was driven by a reopening of the Amplats refinery and a recovery from safety stoppages in the first quarter of the year.

As for manufacturing, Stats SA pointed out that production in the petroleum products/chemicals and motor vehicles/parts divisions contributed to the sharp uptick in manufacturing.

Packirisamy also pointed out that the R23bn drawdown in inventories was the largest growth detractor in the expenditure breakdown of GDP. Destocking was particularly pronounced in the mining and manufacturing sectors.

"A recovery in inventory accumulation could take some time given an expectation of weak domestic demand by SA corporates. The recent Bureau of Economic Research/Barclays Purchasing Managers’ Index for August 2016 revealed weakness in both new domestic sales orders as well as new export orders, flagging ongoing weakness in demand," she said.

Weak investment environment

FNB pointed out that the weak investment environment was reflected in the utilities sector which contracted by –1.8% - the second consecutive fall.

The bank said the construction sector remains very weak, growing just 0.1% in the second quarter and in its view the outlook remains grim when digging through the gross fixed capital formation numbers.

Government (-8.9%), state-owned enterprises (-5.4%) and private business (-3.1%) investment all contracted, collectively delivering a -4.6% q/q fall in capital investment.

The tertiary sector held up well in the face of higher inflation and elevated interest rates with retail growing 1.4%, and finance, real-estate and business services delivering what FNB calls a respectable 2.9% q/q. The transport sector also bounced back robustly, growing 2.9% on better mining and manufacturing volumes.

"This upturn was also evident in the 18.1% acceleration in exports, which bodes well for the current account number due in the coming weeks," said FNB.

KPMG raised the fact that the finance, real estate and business services sectors – collectively the largest industry, accounting for 20% of SA's GDP – grew by 2.9% q-o-q and 2.2% y-o-y during the second quarter.

According to research by the Bureau for Economic Research (BER), confidence among retail bankers, investment bankers and asset managers increased during the second quarter, while confidence among insurers held steady.

"Nonetheless, confidence within the industry is below the long-term average," said KPMG.

READ: SA business confidence could be on the mend - economist


"Depressed consumer and business confidence indices point to a slowdown in growth in the third quarter of the year as rising inflation, weak hiring intentions and muted credit growth constrain household spending, while elevated political risks and soft growth in corporate profitability are likely to cap investment growth," said Packirisamy.

"Though the second quarter print reduces the risk of an annual recession, growth in economic activity is likely to remain sluggish. We expect GDP growth at below half a percent in 2016, increasing to around 1% in 2017 as additional electricity capacity comes on stream and as commodity prices inch higher in response to an improvement in global demand and in reaction to a further reduction in commodity supply."

KPMG commented that Sarb expects 0% growth in the SA economy during 2016, while the International Monetary Fund (IMF) projects a mere 0.1% growth for the calendar year.

"The outlook for the second half of this year is, therefore, far from optimistic, and avoiding a sovereign ratings downgrade in December is certainly not guaranteed," said KPMG.

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