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Cape Town - The outlook for GDP growth is brightening, as inflation and interest rates are on a downward trajectory providing added relief for consumers and businesses, says Overberg Asset Management (OAM) in its weekly economic and market overview.
According to OAM, the consensus view is that GDP will continue to surprise to the upside over the course of the year.
"Positive policy reform, falling inflation and interest rates, synchronised global growth and resurgent sub-Saharan growth will likely lift GDP growth in 2018 well above the modest consensus forecast range of 1.4%-1.8%."
South Africa economic review
• GDP growth beat all expectations in the fourth quarter (Q4). GDP growth accelerated in Q4 to an impressive 3.1% quarter-on-quarter annualised, well above the 1.8% consensus forecast. Q3 growth was revised upwards from 2.0% to 2.3%.
Prior quarters were also revised upwards nullifying the technical recession in Q4 2016 and Q1 2017. The biggest contributor was the agriculture, forestry and fishing sector, which grew output in Q4 by 37.5% on the quarter, contributing 0.8 percentage points to headline growth.
The trade sector followed with growth of 4.8% making a 0.6 percentage point contribution. Manufacturing and finance each contributed 0.5 percentage points, with respective growth of 4.3% and 2.5% on the quarter. The mining sector shrank by 4.4% subtracting 0.3 percentage points from headline growth, while construction shrank by 1.4% subtracting 0.1 percentage points.
The expenditure measure of GDP also grew 3.1% in Q4, driven by household consumption expenditure, gross fixed capital formation (GFCF) and inventory accumulation. Household consumption grew by 3.6% on the quarter contributing 2.2 percentage points to expenditure growth. GFCF increased by a robust 7.4% on the quarter, making a 1.4 percentage point contribution.
Inventories grew in Q4 by R10.5bn adding 2.9 percentage points to headline expenditure growth. Imports of goods and services were the main detractor, shaving headline expenditure growth by 7.2 percentage points, more than reversing the 3.5 percentage point contribution from exports of goods and services. (See Bottom Line for further analysis).
• The South African Chamber of Commerce and Industry (SACCI) Business Confidence Index (BCI) slipped from a 27-month peak of 99.7 in January to 98.9 in February, although remains above any level recorded in 2016 or 2017.
According to the SACCI report: “Although the present business confidence contains substantial positive sentiment, investment decisions will soon have to become reality to create sustainable higher economic growth and employment prospects.”
Among the 13 subcomponents of the BCI, the largest positive contributors were from lower inflation, increased merchandise import volumes, improved new vehicle sales and increased manufacturing output. The high real cost of financing and lower merchandise export volumes had a negative effect on the BCI.
• The Standard Bank Financial Conditions Index (FCI), a measure of broad financial conditions in South Africa, fell slightly in January to -0.21 from -0.18 in December, attributed to a slowdown in corporate credit extension and a contraction in household credit.
An increase in the real interest rate, due to falling inflation, also impacted financial conditions. However, the FCI, despite the latest slip is well above its levels of -0.33 for 2017 and -0.82 for 2016, indicating a pick-up in economic activity in coming months. The FCI is a barometer for economic activity over the next 6-9 months.
• Despite increased global risk aversion amid rising US trade protectionism and domestic uncertainty over land expropriation without compensation, foreign investors remained strong net buyers of South African securities in the past week.
Net foreign investor inflows into South Africa’s equity market gained by an additional R2.4bn in the past week, lifting the month-to-date and year-to-date totals to R4.3bn and R29.2bn, respectively.
This marks a substantial turnaround from the total net equity outflows of R43.1bn in 2017, R124.8bn in 2016 and R1.9bn in 2015. The year-to-date inflow is almost level with the R36bn inflow recorded in the whole of 2010, the year South Africa hosted the FIFA World Cup.
The week ahead
• Manufacturing production, Tuesday March 13. Manufacturing production increased by 2.5% in January 2018, up from 1.8% in December last year, figures released by Statistics South Africa (Stats SA) showed. According to the agency, the biggest contributors included food, beverages and petroleum. Food and beverages were up 0.2% to 0.4% and petroleum at 0.7%.
• Mining production: Due on Wednesday March 14. Mining production, which shrank in the fourth quarter last year by 4.4% quarter-on-quarter annualised is expected to have shown a rebound in year-on-year growth in January helped by the base effect of weak year-ago comparative data. Growth may have accelerated to as much as 5.0% from 0.1% in December.
• Bureau for Economic Research Business Confidence Index: Due on Wednesday March 14. The Bureau for Economic Research (BER) Business Confidence Index is likely to have lifted in the first quarter (Q1) helped by a reduction in political uncertainty and improved policy direction. The BER Business Confidence Index hit a seven and a half-year low of 29 in Q2 2017 and held at 34 in both Q3 and Q4.
• South African Chamber of Commerce and Industry Trade Conditions Survey: Due on Wednesday March 14. The South African Chamber of Commerce and Industry (Sacci) Trade Conditions Survey is expected to have shown a further improvement in February boosted by rising global economic growth momentum, strengthening external demand and rising international commodity prices.
The SACCI Trade Conditions Index increased in January for a second straight month to a seasonally adjusted level of 51 from 48 in December and 41 in November.
Technical analysis
• Having broken key resistance levels at R/$12.50 and R/$11.70, the rand has returned to its appreciating trend, targeting a break below R/$11.00 over coming months.
• The US dollar index has tried but failed to break through a major 30-year resistance line suggesting the three-year bull run in the dollar may be over.
• The British pound has broken above key resistance at £/$1.35 promoting further near-term currency gains to a target range of £/$1.40-1.50.
• The JPMorgan global bond index is testing the support line from the bull market stemming back to 1989, which if broken will project further sharp increases in bond yields.
• The US 10-year Treasury yield has broken decisively above key resistance at 2.5%, targeting the next key resistance level at 3.0%. A break above long-term resistance at 3.6% would indicate an end to the multi-decade bull market in bonds.
• The benchmark R186 2025 SA Gilt yield has broken below key resistance at 8.6%% indicating a new target trading range of 8.0-8.5%.
• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.
• The Brent oil price has broken above key resistance at $60 and likely to remain in a trading range of $60-70 over the foreseeable future. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $7 000 per ton.
• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1 400 target level.
• The break in the JSE All Share index above key resistance levels at 56 000 and 60 000 signal the early stages of a new bull market.
Bottom line
• GDP growth beat all expectations in the fourth quarter (Q4). GDP growth accelerated in Q4 to an impressive 3.1% quarter-on-quarter annualised, well above the 1.8% consensus forecast. Q3 growth was revised upwards from 2.0% to 2.3%. Prior quarters were also revised upwards nullifying the technical recession in Q4 2016 and Q1 2017.
• The outlook for GDP growth is brightening. Inflation and interest rates are on a downward trajectory providing added relief for consumers and businesses. The Reserve Bank is expected to cut its benchmark repo rate by 25 basis points at its March policy meeting and by a further 25 basis points before year-end.
• Political uncertainty has lifted. President Ramaphosa has moved fast to address the country’s most pressing problems, tackling corruption, restoring good governance in the public sector and fiscal restraint at a national level.
• The issue of land expropriation without compensation has damaged business and consumer confidence over the short-term. However, the parliamentary committee tasked with making recommendations will very likely allay concerns. The ANC will not want to deviate from its core policy of promoting economic growth, which it recognises is dependent on business and consumer confidence.
Ramaphosa devoted the full first hour of his State of the Nation Address Address to the economy, in recognition that economic growth will bring down unemployment, eradicate poverty, reduce the budget deficit and fund social upliftment.
• The world is into its second year of synchronised global growth, a rare phenomenon which due to added durability and momentum normally lasts 3-4 years.
Healthy global growth combined with low worldwide inflation and interest rates is a winning backdrop for emerging markets like South Africa with its dependence on trade and commodity exports. While the world’s major central banks will end their emergency quantitative easing programmes, interest rates are likely to adjust upwards gradually.
• The sub-Saharan economy, South Africa’s largest trading partner, is expected to rebound from an estimated growth rate of 2.7% in 2017 to 4.0% in 2018 amid rising commodity prices, better rainfall, falling inflation and declining interest rates.
• Overberg Asset Management reported in October and November 2017 that South Africa’s GDP growth expectations for the fourth quarter and for 2017 were overly pessimistic. GDP growth will continue to surprise to the upside over the course of the year.
• Positive policy reform, falling inflation and interest rates, synchronised global growth and resurgent sub-Saharan growth will likely lift GDP growth in 2018 well above the modest consensus forecast range of 1.4%-1.8%.
For the full report, including a look at international markets, click here.
* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.
Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.
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