S&P Cuts South Africa Growth Outlook
As the global economy walks on a leg, S&P has cut South Africa’s economic growth outlook, according to a report. The global ratings firm said it was a tale of two quarters in the first half of 2022, as South Africa’s gross domestic product (GDP) briefly rose above the pre-COVID-19 pandemic level in Q1, only to fall behind that recovery milestone in Q2.
South Africa’s real GDP growth outlook was cut to 2.0% for 2022, from 2.2%. For 2023, S&P forecasts real GDP growth of 1.6% for the country.
“The lifting of pandemic-related restrictions put the wind in the sails of the manufacturing and service sectors in the first quarter of the year when they expanded 1.7% quarter-over-quarter”, it said.
That momentum collapsed in the second quarter, when output contracted 0.7%, halted by the floods in KwaZulu-Natal province (South Africa’s second-largest province by GDP), continued supply chain issues, and frequent power interruptions (due to load-shedding).
S&P said the weakness affected all subcomponents of GDP, with net exports proving a particular drag, as import volumes vastly outpaced exports. Seven of the ten broad industry sectors ended the quarter in the red–including agriculture, manufacturing, construction, and mining.
Recent data relating to activity in the third quarter offers renewed hope for growth. In August, S&P Global Ratings’ manufacturing PMI bounced back strongly to 51.7, while domestic vehicle sales remained buoyant.
Residential building activity appears to be faltering, though planning for commercial buildings is livelier, according to the FNB/BER Building Confidence Index.
Retail and wholesale confidence proved surprisingly resilient, despite high inflation and rising interest rates weighing on consumers’ disposable income. It noted that consumer confidence edged higher in the third quarter, but remains well below the historical average.
The potential for power outages due to load-shedding, which should prove more sporadic over the third quarter, and the risk of more outages over summer, makes us wary of pencilling a sharper recovery in the second half of 2022.
South Africa’s growth prospects for the next two years appear limited by external headwinds, stronger inflation, and higher interest rates.
The gloomier global growth outlook is putting downward pressure on iron ore and platinum group prices -the S&P GSCI Industrial Metals price index peaked in March but remains above the pre-pandemic highs.
“Still, we expect exports to perform relatively well over the year led by coal, in both volume and total value terms. Europe’s surging demand for coal might boost exports further, but is likely to run into transport capacity constraints”, the report added.
Analysts increased CPI inflation forecast to over 6%, on a year-over-year basis until mid-2023.
“That is above the upper bound of the South African Reserve Bank’s (SARB) target and we expect only a gradual decline over the following several quarters”. READ FBNH, First Bank Boards Changes Ensured Stability –S&P
Core inflation is close to the mid-point of SARB’s 3%-6% target range, and should stay within that range in the coming months.
Despite the outlook for core inflation, S&P now expects SARB to raise the key policy rate to 6.75% by the end of this year, up from its previous forecast of 5.5%, and then further to 7% by the first quarter of next year, prompted by rising inflation expectations, depreciation pressures on the rand, and an accelerated cycle of monetary policy tightening by the U.S. Federal Reserve.
As headline inflation starts to decline and falls below the upper bound of the central bank’s target (<6%), and assuming core inflation remains under control, S&P analysts said they expect SARB to begin cutting interest rates, though gradually and with a close eye on the Federal Reserve’s activity.
# S&P Cuts South Africa Growth Outlook#