SOUTH AFRICA PREVIEW: Growth Looks Feeble, 1Q a Touch Better

JOHANNESBURG (Capital Markets in Africa) – South Africa’s economy probably slowed in the last quarter of 2018, hit by weaker consumer spending and manufacturing as well as lower mining output. The economy should recover in 1Q, albeit slightly, as disruptions caused by electricity blackouts and a poor performance in the mining sector keep a lid on growth.

• We expect growth of 1.0% quarter-over-quarter (annualized) in 4Q18 compared with consensus of 1.2%. Our projection for 1Q19 is 1.6% and we forecast expansion of 1.4% in 2019 overall. The 4Q data is due at 9:30 a.m. London time today.
• The combination of strong domestic demand and weakening exports is putting added strain on South Africa’s current account. It also threatens to depress the rand, which we view as negative for growth in the short term. The rand registered its worst decline in February since 1996.

The 2.2% quarter-over-quarter annualized expansion in 3Q largely reflected a rebound in consumption and inventories after an increase in value added tax and fuel levies in 2Q18. We expect this positive impact to carry over into 4Q, but with less momentum.

Growth Set to Slow After Strong Recovery
Monthly data for 4Q18 show retail sales and manufacturing both slowing in quarterly terms while the mining sector continued its contraction. The outlook for the industrial sector in 1Q is bleak with the manufacturing PMI plunging in February.

Retail Sales Likely to Slow
We also expect a weaker contribution from inventories to weigh on growth in 4Q after it added the most to headline GDP in more than two years in 3Q18.

Inventories Likely to Weigh on 4Q Growth
The significant decline in global oil prices is unlikely to play out in full until 1Q19, as fuel prices were only cut sharply in December and January.

Lower Transport Prices to Fuel 1Q
The supply-side picture is more troubling, especially for the industrial sector. Blackouts will probably hit industrial production in 1Q and possibly beyond as the government seeks to reduce its financial exposure to loss-making power utility Eskom Holdings. We also expect the continued wave of mergers in the gold mining sector to accelerate the pace of mine closures.

The boom in palladium prices has partly offset weaker prices for other minerals, most notably gold and platinum, but we still expect the mining industry to keep contracting this year. We reduced our real GDP growth forecast for 2019 in January to 1.4% from 1.9% previously, partly as a result of these factors.

Mark Bohlund covers Africa for Bloomberg Economics in London. He has previously worked as an economist at IHS Global Insight, BMI Research (now part of Fitch Group) and the Swedish Foreign Office.

Source: Bloomberg Business News