Economic Research - by Annabel Bishop

Overview
Latest Articles
Archive reports
Annabel Bishop Profile

Overview

We collate the Investec Group’s considerable analytical resources to provide reports with a South African market perspective.

South Africa is a medium-sized economy with a gross domestic product of R3 trillion and a population of 50 million. While GDP per capital measurements place SA in the middle income category, the country's very high level of income inequality means a large percentage of the population lives in poverty. The manufacturing and finance sectors are the largest and the retail sector the greatest formal private sector employer.

The South Africa economy grew by 2.5% in 2012 in an environment of weak global growth, and is expected to expand by closer to 3.0% y/y this year. The relative economic stability the ANC has achieved since 1994 provides a sound base from which to attain employment creating growth of 5-6%, although recent escalations in labour unrest and resultant investor uncertainty have undermined SA’s potential growth trajectory. Greater unity in the ruling tripartite alliance is now needed to ensure SA achieves the aims of the National Development Plan (NDP), an economic framework for the country until 2030 that aims to eradicate poverty and reduce inequality and unemployment, the latter to single digits, via sustained, accelerated real growth that trebles the size of the economy.

Latest Articles

SA: SARB Interest Rate Announcement, CPI

US: May FOMC Minutes, Fed Chairman Bernanke Testifies to Joint Economic Committee

Euro zone: Flash PMI Estimates

SA: Retail Sales

US: Retail Sales, Industrial Production, CPI, PPI, Philly Fed and Empire State, Manufacturing Surveys, Housing Starts

Euro zone: EU17 Preliminary Q1 GDP, Industrial Production, Final CPI

In March, manufacturing production contracted at a rate of 2.2% y/y following a drop of 2.8% y/y in February (revised from -2.9% y/y previously).The outcome for March diverged from market expectations of positive growth of 1.8% y/y.

In April, gross reserves increased slightly, to USD50.31bn from USD50.01bn in March, which contrasted with market expectations of a drop to USD49.80bn. Net reserves decreased to USD45.83bn from a prior USD46.08bn, with the outcome virtually in line with market consensus of USD45.89bn.

SA: Manufacturing Production, Mining Production, Unemployment, Gross Reserves

US: Weekly Jobless Claims, Wholesale Inventories

Euro zone: Final Composite and Services PMI, Retail Sales

Activity in the manufacturing sector rebounded in April as reflected by the increase in the PMI back into expansionary territory. Specifically, the seasonally adjusted manufacturing (Kagiso) PMI rose to 50.5 in April from 49.3 in March. The outcome for April surprised market consensus, of 48.8, in its strength.

M3 growth accelerated to 8.47% y/y in March from a prior 7.71% y/y, in contrast to market expectations of a fall to 7.50% y/y. In March, government coupon payments will have provided a seasonal boost to money supply in the month. In m/m terms, M3 rose 1.49% compared to 0.24% m/m in February.

Archive reports

Annabel Bishop Profile

Annabel Bishop is Investec Bank Limited’s Chief Economist in South Africa. She joined Investec in 2001 and has worked in the macroeconomic and econometric field for 18 years. Annabel is the holder of the Sake/Beeld Economist of the Year title for 2010 and has won numerous monthly Reuters Econometer awards for correctly forecasting a range of economic variables.

Before joining Investec, Annabel was the Economic Analyst at Econometrix, providing key macroeconomic research and specific project work to a variety of clients across the economy, as well running the firm’s econometric model. She holds a cum laude master’s degree in economics and econometrics from the University of Pietermaritzburg in South Africa and left McCarthy Bank in 1998, where she held the position of SA economist.

Government

SA’s 2013 Budget showed a revenue shortfall of R16.3bn due to the interruption to production caused by strike action and also the negative impact of lower commodity prices, causing the budget deficit projected for 2012/13 to widen to 5.2% of GDP, from the previously forecast -4.8% of GDP. While the deficit is still expected at 3.1% of GDP in 2015/16, debt is expected to peak marginally higher than the previously estimated 39.2% of GDP in 2015/16, at 40.3%. We believe today’s budget outcome is not likely, in isolation, to prompt any of the rating agencies to downgrade SA’s sovereign credit rating, although the slower economic growth projections are concerning.

As expected, President Zuma’s State of the Nation Address focused on the National Development Plan and its triple aims of reducing unemployment and inequality and eliminating poverty. This underscores the support given to the NDP at the ANC’s recent elective conference with the President detailing that “all will have water, electricity, sanitation, jobs, housing, public transport, adequate nutrition, education, social protection, quality healthcare, recreation and a clean environment” by 2030.

With economic growth and job creation more fragile this year than last, fiscal policy remains counter-cyclical (supportive of economic growth in the short to medium-term). Planned government spending has been revised down very marginally in 2012/13, 2013/14 and 2014/15 in rand terms, although as a % of GDP it remains similar to the previous projection made at the Budget in February this year, due to weaker than expected growth. However, the budget deficit is only projected to drop to around 3.0% of GDP by 2015/16 (previously the consolidation was projected for 2014/15), and the primary balance approach 0% in 2015/16 (vs 2014/15 in the previous projections). The time period for fiscal consolidation has been extended by one year.

Monetary policy

The South African Reserve Bank (SARB) left the repurchase rate unchanged at 5.0% today, as widely expected, citing the risk of CPI inflation temporarily breaching the upper limit of the inflation target range (of 3-6%) in the third quarter of 2013.The SARB identified exchange rate depreciation and high wage settlements as key risk factors to CPI inflation, raising its forecast for 2013 from 5.5% y/y to 5.8% y/y. The CPI forecast does not include the new CPI weights and rebasing, but will incorporate these changes in the next release.

South Africa’s current economic policy, the New Growth Path, states "(t)he monetary policy stance will continue to target low and stable inflation but will do more to support a more competitive exchange rate and reduced investment costs through lower real interest rates (emphasis in green Investec’s own). This will be accompanied by measures proposed below to contain inflationary pressures and build competitiveness."

The South African Reserve Bank left the repurchase rate unchanged at 5.0% today, as widely expected. The SARB identified the fact that CPI inflation has troughed this year, and that the outlook for inflation has deteriorated somewhat although inflation is still likely to remain within target over the forecast period. This was to be expected due to the high correlation between international and local grain prices; grain price inflation at the agricultural level is running close to 30% y/y as international grain prices are near record highs.

Price inflation

In SA state controlled price increases, particularly water and electricity (see figures 1 and 3), are placing significant upward pressure on the inflation rate consumers face (CPI inflation). The inflation rate of electricity ran at 10.2% y/y and water at 9.2% y/y in March 2013 (see figure 3), versus the CPI inflation rate of 5.9%.

Headline PPI inflation (final manufactured goods) accelerated to 5.7% y/y in March, from a prior 5.4% y/y (market consensus 5.4% y/y). On the month it rose by a robust 0.9% m/m, driven by price pressure at the intermediate manufactured goods level.

Consumer inflation remained unchanged in March, versus February, at 5.9% y/y, slightly below the market expectations of 6.0% y/y. In m/m terms, CPI growth accelerated to 1.2% from 1.0% in February.

CPI inflation came out above consensus expectations in February, at 5.9% y/y (January 5.4% y/y, consensus 5.6% y/y) as inflation ran just under the upper limit of the inflation target range of 3-6%.

Private sector

Retail sales registered growth of 3.8% y/y in February, surprising market expectations of 1.8% y/y to the upside. This marks an acceleration on January’s growth of 2.2% y/y, which was revised up from a prior 1.9% y/y, but is below the average of 4.8% y/y in 2012.

The FNB/BER consumer confidence index (CCI) fell to -7 in Q1.13, from Q4.12’s -3, as consumers’ rating of the outlook for the national economy, their own financial prospects and the appropriateness of the present time to buy durable goods all deteriorated.

Employment in the formal (non-agricultural) sector rose by 1.0% y/y in Q3.12 or by 10 000, with a net 20 000 jobs created in the civil service and 15 000 lost by the mining sector.

Production

In March, the trade account registered a deficit of R7.8bn which surprised market expectations of R8.8bn to the downside. The magnitude of the March deficit narrowed from February’s deficit of R9.8bn but was still higher than the deficit of R 5.5bn incurred in March 2012.

At 2.7% qqsaa, Q1.12’s GDP growth was weaker than that of Q4.11’s 3.2% qqsaa but above the consensus expectation of 2.3% qqsaa. The mild slowdown was driven mainly by the mining sector on the back of strike action, without the 16.8% qqsaa contraction in mining activity GDP growth would come out above Q4.11’s 3.2% qqsaa. There is likely to be a rebound in GDP growth when mining production resumes in the afflicted areas.

Rand update

The rand’s weakness past the key psychological level of R9.00/USD (see figure 1) has been driven by a number of factors, including the improved outlook for the global economy while investor concerns mount over the outlook for SA’s bonds and equities on the recent rating downgrades and strike action.

The rand has weakened from R8.10/USD to R9.04/USD, from R12.70/GBP to R14.32/GBP and from R9.94/EUR to R12.04/EUR to date since the start of the strike action and in August 2012 in the mining industry, that ran over into the transport sector, then the agricultural sector and most recently the social unrest in the Vaal area.

SA has seen the rand weaken on a recent slew of bad news ranging from Moody’s rating downgrades of both SA’s and its key corporates’ debt (see “Ratings update: Moody’s indicates further downgrades may follow yesterday’s downgrade of SA government bonds”, 28th September 2012, contact details below), S&P’s downgrade, violent strike action and increased political tensions, to worsening global economic activity and renewed concerns over the euro zone debt crisis.

The rand continues to demonstrate its close relationship to international events, exhibiting a high degree of volatility this year on the fluctuation in risk aversion levels.

SARB Quarterly updates

Gross domestic expenditure contracted in Q4.12 (-0.9% qqsaa), after rising by 4.1% qqsaa in Q3.12, driven by decreased government expenditure as the high level of spending on armaments in Q3.12 was not repeated in Q4.12. A contraction in inventory holdings and slower growth in household spending and domestic fixed investment also occurred.

South Africa’s current account deficit remained unchanged, at 6.4% of GDP in Q3.12 from Q2.12’s reading, as significantly slower economic growth countered the impact of the ballooning of the trade deficit.

South Africa’s current deficit rose to 6.4% of GDP in Q2.12 from 4.9%, returning to ratios last seen in 2008. However, unlike 2008 the widening of the current account deficit was driven by weakening exports and a rise in imports (particularly a rebound in oil imports on the quarter following an unplanned shutdown of a single-buoy mooring in Q1.12). The trade account consequently recorded a deficit of 2.4% of GDP, while the income and services account recorded a deficit of 2.8% of GDP largely comprising of dividend and coupon payments to foreigners holding SA equities and bonds. (The remaining 1.2% of GDP of the current account is accounted for by transfers, essentially SACU payments (distribution of customs and excise monies collected to Lesotho, Botswana, Swaziland, and Namibia).

Week Ahead

SA: SARB Interest Rate Announcement, CPI

US: May FOMC Minutes, Fed Chairman Bernanke Testifies to Joint Economic Committee

Euro zone: Flash PMI Estimates

SA: Retail Sales

US: Retail Sales, Industrial Production, CPI, PPI, Philly Fed and Empire State, Manufacturing Surveys, Housing Starts

Euro zone: EU17 Preliminary Q1 GDP, Industrial Production, Final CPI

SA: Manufacturing Production, Mining Production, Unemployment, Gross Reserves

US: Weekly Jobless Claims, Wholesale Inventories

Euro zone: Final Composite and Services PMI, Retail Sales

SA: M3, PSCE, Trade Balance, Kagiso PMI

US: FOMC Announcement, Non-Farm Payrolls, ISM Manufacturing

Euro zone: ECB Announcement, Economic Confidence, PMI Manufacturing

Euro Zone Sovereign Debt Crisis

Cyprus became the latest country to seek a bailout from the euro zone this week, which was not unexpected. However, the funding mechanism of the bailout, which makes use of a tax on individual’s savings in their bank accounts, came as a shock to markets, so much so that it reawakened fears of an escalation in the sovereign debt crisis and increased risk aversion levels globally.

The German population appears to be increasingly wary of the problems euro membership brings.

Prospects

	2011/12	2012/13
GDP (real, %)	3.1	2.8
Prime lending rate (%, year-end)	9.0	9.5
CPI inflation (%)	5.0	5.9
Current account (% GDP)	-3.5	-5.5
Current account (Rbn)	-101.9	-174.0
USD/ZAR (average)	7.25	7.72
GBP/ZAR (average)	11.61	12.03
EUR/ZAR (average)	10.08	10.22
YEN/ZAR (average)	11.07	10.52
Budget deficit (% GDP)	-5.0	-5.2

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Economic Research - by Annabel Bishop

Overview

We collate the Investec Group’s considerable analytical resources to provide reports with a South African market perspective.

Latest Articles

Latest Articles

Scope for April CPI inflation to tick lower and SARB expected to keep interest rates on hold

Retail sales likely to show Easter-led robust growth, while rand weakness mitigates the effect of lower global commodity prices on inflation

Contraction in production again driven by lower production of iron, steel, metal products and machinery

Weaker USD and maturing FX swaps prop up gross reserves

Manufacturing and mining data due, whilst unemployment figures are unlikely to inspire confidence

April PMI rebounds back into expansionary territory whilst cost pressures abate

Relatively benign credit demand from corporates, versus households, continues to constrain overall PSCE growth

Archive reports

Archive reports

Annabel Bishop Profile

Government

Weaker USD and maturing FX swaps prop up gross reserves

Slower GDP growth expectations widens projected debt, deficit ratios, and recognition that this necessitates slower expenditure growth

Taxation to be examined to ensure future government revenue will meet expenditure. If not government has said taxes will rise

A balancing act in a slower growth environment that may not placate the rating agencies

Monetary policy

Interest Rates Unchanged, Focus on Possible Wage-Price Spiral and its Potential to Exacerbate Unemployment

Low Interest Rates are Part of SA’s Economic Policy

SARB leaves interest rates unchanged as widely expected

Price inflation

State controlled prices push up inflation in a weak growth environment, the Reserve Bank warns on stagflation

Previously higher commodity prices and rand weakness elevate PPI inflation

CPI hovers near upper target band but monetary policy to remain accommodative

CPI update: just below the upper limit of the target range of 3-6%

Private sector

Relatively benign credit demand from corporates, versus households, continues to constrain overall PSCE growth

Rebound to 3.8% y/y after January's dip, we continue to expect Household Consumption Expenditure growth of 3.2% y/y for 2013

Sharp fall supports likely weak growth in consumer spending in Q1.13

Mining sector sheds 15 000 jobs in strike heavy third quarter, feed through suppresses employment creation elsewhere

Production

Contraction in production again driven by lower production of iron, steel, metal products and machinery

April PMI rebounds back into expansionary territory whilst cost pressures abate

Further increase in exports contributes to a narrower trade deficit in March

GDP Update Q2 2012

The Rand

Re-Rating of South Africa Versus Global Sees Rand Weaken

Rand Outlook: Escalated Strike Incidence, Fitch Downgrade and Dwindling Incentives for Foreign Investment Afflict the Rand

The Future of the Rand

The volatile domestic currency is now facing QE3

SARB Quarterly Updates

SARB Quarterly Bulletin Update: Slower consumption growth as private sector capital investment picks up

The Pervasive Effects of the Recent Strikes Run Through the Third Quarter Data

Current account of 6.4% of GDP mainly driven by dividend and coupon outflows to foreign investors

The Week Ahead

Scope for April CPI inflation to tick lower and SARB expected to keep interest rates on hold

Retail sales likely to show Easter-led robust growth, while rand weakness mitigates the effect of lower global commodity prices on inflation

Manufacturing and mining data due, whilst unemployment figures are unlikely to inspire confidence

SA’s consumer credit and international trade balance data due, Eskom warns of winter electricity outages, petrol to be cut by 73c/litre

Euro Zone Sovereign Debt Crisis

Euro zone sovereign debt crisis: the pain trickles down as a precedent for future bailouts is set by the proposed Cyprus wealth tax

Euro zone sovereign debt crisis: cracks widen, Germans’ neins increase