South Africa’s rand strikes back after better-than-expected GDP data
The rand responded well to news that South Africa’s economic growth rebounded in the second quarter.
Having lost more than 5% against the dollar in September, the local unit added nearly a percentage point in afternoon trade on Tuesday, after data from StatsSA showed a higher-than-expected GDP figure of 3.1% (seasonally adjusted, annualised) for Q2 2019, while annual growth also exceeded expectations, coming in at 0.9%.
The median estimate of 17 economists in a Bloomberg survey was 2.5%.
Bloomberg economist, Mark Bohlund, said: “The reading was stronger than both our forecast of 2.2% as well as consensus 2.5%, and recouped all of the output lost in 1Q when power outages crippled economic output. We expect growth to slow to around 1.0-1.5% in 2H19 and going into 2020, but exogenous shocks may knock down this number.”
“The improved GDP growth will work to overcome negative sentiment towards South Africa, but it will also assist in bolstering the anticipated combined growth expectation for the year,” said Bianca Botes, treasury partner at Peregrine Treasury Solutions.
Reza Hendrickse, portfolio manager at PPS Investments, said: “This is a strong outcome on the face of it, but viewed in the context of the prior quarters’ significant contraction, the rebound from a depressed base is less spectacular. Encouragingly, this positive reading means that a recession has been averted for now, though it doesn’t escape the fact that underlying growth remains weak.”
“The primary sector was a large contributor to this quarter’s rebound, with a jump in mining offsetting weakness in agriculture.
“A pick-up in service activity also made a significant contribution, driven by finance, trade and government activity. Thanks to more reliable electricity supply this quarter, the manufacturing sector and electricity production side of the economy also contributed to growth. The agriculture, construction and transport sectors on the other hand contracted this quarter,” Hendrickse said.
He said that Tuesday’s GDP data release is a step in the right direction, “but the stop-start pattern of growth that we have become accustomed to means expectations will remain tempered”.
“Base effects and reasonable growth outside of SA have carried us for the moment, but sustained growth relies on overcoming the structural challenges that hamper productivity and economic development.”
PPS Investments said that finance minister Tito Mboweni’s recent economic reform document tries to address some of this, while at the same time engineering the economy towards a 2% to 3% growth rate and creating 1 million jobs.
“In principle it is ambitious, but the initial resistance to it, both within the ANC and from its alliance partners does not inspire confidence.
“Looking ahead, despite the jump in second quarter growth, one should bear in mind that GDP data is inherently backward looking. In contrast, forward indications remain consistent with a subdued domestic growth outlook, with a similar message embedded in our most recent PMI data,” Hendrickse warned.
South Africa’s annual inflation rate fell to a six-month low in July. Consumer price growth slowed to 4% from 4.5% in June, StatsSA said late last month.
Key Insights from Bloomberg:
- Growth was largely due to statistical base effects and a stabilisation in power supply, after the nation suffered the deepest blackouts in a decade in the first quarter, rather than a marked improvement in economy activity.
- The rebound may be short-lived with economic prospects in Africa’s most-industrialised economy dim amid stubbornly low business confidence and weak factory activity. The South African Reserve Bank forecasts gross domestic product expansion of 0.6% this year while the Bureau for Economic Research expects a 0.2% expansion.
- Economic growth may be undermined by a deterioration in public finances, which poses a risk to the country’s investment-grade credit rating, Lara Hodes, an economist at Investec Bank Ltd. said in a note before the data release.
- The second quarter’s expansion was led by a rebound in the mining industry, which grew by 14.4% compared with a contraction in the previous three months, while the finance industry grew by 4.1%. Farming contracted by 4.2%.
The rand traded at the following levels against the major currencies:
- Dollar/Rand: R15.12 (0.84%)
- Pound/Rand: R18.18 (1.20%)
- Euro/Rand: R16.54 (1.16%)
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