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Economic improvement through quantitative research |
Commentary
Second Quarter GDP Contraction : Released September 2020
The second quarter April to June 2020 was squarely the period of severe lockdown restrictions in the economy and the measured numbers of the GDP contraction were eagerly awaited. The figures released by StatsSA on 8 September show that the economy contracted by 16.4% compared to the first quarter of 2020, which was for the most part prior to the lockdown period. Although the second quarter contraction is quoted using the annualised figure of - 51%, this is misleading in that the contraction was a unique event under the Covid circumstances. The economy will have recovered during the third quarter, July to September, as the lockdown levels were reduced in severity. A reasonable estimate is that the Q3 contraction relative to Q1 2020 will be around half that of Q2 ie around - 8.2% relative to Q1 which would imply + 10% relative to Q2 2020. This will place economic growth for the 2020 year at - 7 to - 8 % which is line with many forecasts for the year.
July CPI : Released September 2020
Headline CPI inflation rose to being above the lower bound of the Reserve Bank's inflation target range in July, coming in at 3.2% y-o-y, from 2.2% y-o-y in June. The July outcome was higher than market expectations. A significant contributor to the higher CPI was a rise in the fuel inflation rate resulting from higher oil prices. The fuel inflation rate rose sharply to -6.2% y-o-y in July from -20.9% y-o-y in June.
July Manufacturing : Released September 2020
July’s manufacturing sector figure came in at -10.6% compared to a year earlier, from -15.8% in June. This is an indication of partial recovery from the very low activity level in the April to June 2020 period. With the move to lockdown level 2 from 18 August, the manufacturing production figure should show further improvement in August.
July Mining : Released September 2020
Mining production data for the month of July came in at -9.1% y-o-y, compared to -28.2% y-o-y in June, a better-than-anticipated recovery into the first month of Q3 2020. This early data, along with improved Q3 2020 business confidence data and the BETI transactions index, support a view that the rebound in Q3 2020 could be significant, which sets the trend for a fairly rapid recovery back to the longer-term stagnant levels pre-virus.
Encouraging CPI inflation rate in December 2019
The CPI inflation rate increased to 4.0% after falling for 4 months to reach 3.6% in November, after an already low rate of 3.7% in October 2019. This was anticipated due to statistical factors relating to fuel prices which increased relatively in December. Inflation has cont8nued to be well below the midpoint of the Reserve Bank target range (4.5%). It should bode well for monetary policy going forward. However, the effects of fuel costs have been to pull the CPI index downwards over the past few months, and are likely to have the converse effect over the course of 2020.
Load-shedding blow to growth recovery
The SA economy was already in a very weak state in Q3 2019, with GDP growth coming in at -0.6%. This followed negative growth in Q1 of -3.1%, and growth in Q2 only such as to compensate for the Q1 contraction. There was hope of some recovery in the fourth quarter which would avoid a technical recession of two successive quarterly contractions. The severe effect of the load-shedding in the first part of December however now bring the strong possibility of a further economic contraction in Q4 2019.
Manufacturing output in October 2019
Manufacturing continued negative in October 2019 in year on year growth terms, at -0.8%. Even though this is some recovery from even weaker levels in the preceding months, it will still be a likely negative contributor to economic growth in Q4 2019. The current negative trend of the manufacturing sector has been in place since April, and there is no clear sign as yet that it is moving into positive territory.
Likely cut at MPC meeting 18 July 2019
With the SA economy showing continued signs of weakness and the inflation rate having continued to be close to the midpoint of the 3 to 6% target band, there is clear scope for the MPC of the Reserve Bank to announce a cut in the repo rate at the conclusion of its meeting on 18 July. This is made even more likely by the stronger Rand shift over the past few weeks. Also contributing is the dovish pronouncements of the US Fed, which show a view towards a reduction in the US Fed Funds rate. The SA reduction would be the first in 16 months, and follows a controversial hike of 25 basis points by the Reserve Bank in November 2018.
Electricity decline in May 2019
The decline in growth of electricity production in May 2019 by -0.6% and in consumption by -1.3% is an early indicator that the economy is still failing to gain much traction in the second quarter of 2019. The picture is even slightly worse in view of the export of electricity having increased in May due to supply arrangements to Zimbabwe. Mining production also showed negative growth in May, though some positive growth in the manufacturing sector will compensate for this to some degree.
Rand strength : can it continue?
The recent strength in the Rand has been partly the result of weakening of the US $ over this period due to expectations of a drop in the US Fed Funds rate together with the negative consequences of the trade tensions with China. The strength is also a consequence of more generalised positive sentiment towards emerging market currencies and movement towards merging markets from the US and European markets. But the positive trend could be reversed if the Feds expected interest rate reductions do not fully materialise. There is also a continued very severe fiscal situation which South Africa faces, which could require more pressure to be placed on the domestic bond market, and could at some point even result in a further negative move in the assessments of the major rating agencies.
