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Cape Town - While the SA Reserve Bank has cut its GDP forecast for 2017 from 1.0% to just 0.6% in September, the country's latest monthly economic data has been far more robust than expected.
This paves the way for an upside surprise in third quarter GDP growth.
South Africa’s GDP growth is likely to beat forecasts in the third quarter, and accelerate into year-end and in 2018. Falling inflation and declining interest rates will boost consumer spending and business investment spending.
SA economic review
• Manufacturing production unexpectedly increased in August by 1.5% year-on-year more than reversing the 1.1% decline in July and well ahead of the consensus forecast for a 0.5% decline.
The biggest contributor was the “basic iron and steel, non-ferrous metal products, metal products and machinery division”, which increased output by 11.3% on the year and contributed a full 2 percentage points to overall manufacturing growth.
The “motor vehicles, parts and accessories and other transport equipment” category was surprisingly weak given the recent pick-up in new vehicle sales, with growth of just 0.6% on the year. The overall data are encouraging, with manufacturing showing month-on-month growth of 0.3% and 1.3% quarter-on-quarter over the three months to end August.
The outlook for manufacturing is improving, helped by strengthening global demand and rising commodity prices.
• Mining production grew in August by an unexpectedly strong 6.9% year-on-year gaining on the upwardly revised 1.9% growth in July and well ahead of the 0.5% consensus forecast.
Mining output increased in August by a substantial 5.3 month-on-month and 1.4% quarter-on-quarter over the three months to end August, signaling a pick-up in momentum.
Ten of the twelve mining categories recorded growth, led by diamonds, iron ore and gold, with year-on-year growth of 27.7%, 9.0% and 7.7%.
Only copper and building materials suffered declines, of 19.8% and 0.5% respectively. Mining production is being aided by gradually rising global commodity prices, which are well above the decade lows reached in 2016.
Iron ore prices are the exception, falling almost 20% since the start of the year, although still well above the lows last year.
The outlook for commodity prices is constructive, buoyed by stronger than expected growth in China and potential for increased global infrastructure spending.
• While the IMF lifted its growth forecast for the world economy and for most countries, South Africa was one of the few exceptions. In the World Economic Outlook report the IMF cut its forecast for South African GDP growth in 2017 from a previous 1.0% to 0.7%.
In its report the IMF stated that it expects South Africa’s growth to remain “subdued…as heightened political uncertainty saps consumer and business confidence".
Much rests on the upcoming mini budget on 25 October, the potential for further credit rating downgrades and the ANC elective conference from 16 to 20 December. The IMF report cited rapidly rising public debt and a lack of fiscal capacity.
• Foreign investors purchased a net R3.312bn of South African equities in the week ended 13th October, the biggest weekly inflow into the equity market in 12 weeks. For the month-to-date net equity investor inflows have climbed to R4.766bn.
While the year-to-date balance remains strongly negative at -R68.59bn the turnaround over the past fortnight may signal better times ahead. The positive foreign net inflows into the equity market since the start of the month coincide with a rapid rise in the All-share Index over the same period from 55 300 to 57 792 a gain of 4.5%.
Net bond inflows have been mildly negative in the month-to-date to the tune of -R1.071bn although positive since the start of the year by R68.452bn. The net year-to-date effect of bond inflows and equity outflows is a marginal net outflow of -R0.138bn.
The week ahead
• Consumer price inflation: Due on Wednesday 18th October. Consumer price inflation (CPI), which picked-up slightly from 4.6% year-on-year in July to 4.8% in August, is expected to rise to above 5% in September due mainly to fuel price increases during the month.
However, CPI is likely to fall back to around 4.5% by early 2018 helped lower by a continued easing in food price inflation. This is well within the Reserve Bank’s 3% to 6% target range.
• Retail sales: Due on Wednesday 18 October. Following a dismal start to the year retail sales have shown signs of life in the past two-to-three month.
Retails sales are expected to build on July’s 1.8% year-on-year increase with growth likely to exceed 2% in August. Consumers are benefiting from subdued inflation, lower interest rates and a slight gain in credit extension.
Technical analysis
• The rand needs to break through key resistance at R/$13.00, which if broken would target further gains to R/$12.50 and thereafter R/$12.00.
• The 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 £/$1.30 promoting further near-term currency gains to a target range of £/$1.35-1.40.
• 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 failed to break below key resistance at 2.0% raising the probability that the multi-year bull trend in US bonds is over.
• The benchmark R186 2025 SA Gilt yield is trading in a tight trading range of 8.5% to 9.0%. A break above 9.0% is required for the yield to move decisively higher towards the 10.5% target level.
• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdqaq 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 $50 and likely to remain in a trading range of $50 to $60 over the foreseeable future. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $6 000 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 above 54 200 on the JSE All-share index projects an upward move to 60 000 marking a new high for the JSE.
Bottom line
• In July, the SA Reserve Bank cut its GDP forecast for 2017 from 1.0% to 0.5%, before lifting it to 0.6% in September. Its GDP forecasts for 2018 and 2019 were also lowered from 1.5% to 1.2% and from 1.7% to 1.5%.
• The latest monthly economic data has been far more robust than expected paving the way for an upside surprise in third quarter GDP growth.
Mining production increased in August by an impressive 6.9% year-on-year, its strongest growth since March. Manufacturing production increased 1.5% on the year, also exceeding expectations, marking its first year-on-year gain since March.
August retail sales, published on Wednesday, are expected to show year-on-year growth of 2.8% building on July’s 1.8% growth rate. Consumers are benefitting from falling inflation and lower interest rates. Agricultural production is continuing to gather momentum.
The government’s Crop Estimates Committee raised its 2017 maize harvest forecast in September by a further 2.2% from its August forecast. The 2017 maize harvest is expected to reach 16.744 million tonnes compared with 7.78 million tonnes in 2016. Agriculture is likely to maintain the 21.2% year-on-year growth it achieved in the second quarter.
• South Africa’s GDP growth is likely to beat forecasts in the third quarter and accelerate into year-end and in 2018. Falling inflation and declining interest rates will boost consumer spending and business investment spending.
• A shrinking current account deficit will make the rand less susceptible to political shocks and external risk events.
• The global economic backdrop is supportive. Synchronised global growth is gaining momentum, positive for commodity prices, export demand and inflows of foreign investment capital.
• The sub-Saharan economy, South Africa’s largest trading partner, is expected to rebound from 0.7% growth in 2016 to 2.7% in 2017 and 4.0% in 2018 amid rising commodity prices, higher rainfall, lower inflation and falling interest rates.
• Last week the JSE had climbed for nine consecutive days, registering successive record highs. Equity markets are clearly discounting better times ahead. The economic rebound recorded in the second quarter is likely to gain traction over coming quarters providing welcome relief to businesses and households.
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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