Executive Summary

·        Since our last publication, more high-frequency economic data for South Africa became available for 1Q18, in which most real economy indicators showed marked deterioration. Mining and manufacturing production contracted over the quarter and would likely contribute negatively towards 1Q18 GDP growth. Retail sales contracted by 1.3% over the quarter in 1Q18, which could be attributed to the high base in 4Q17 when sales had surged. The PMI, however, bucked this trend and had improved over the quarter – higher new orders and better business activity were key drivers of the PMI higher. Over the medium-term, GDP growth is expected to rise marginally, as a result of better confidence, greater investment and consumption activity and an improvement in service-sector growth. Nedbank Group forecasts GDP growth at 1.8%, 1.9% and 2.4% over the next three years. While the SARB assesses the risks to the growth outlook are to the upside, we believe that there is a fair share of downside risks as well over the medium-term.

·        SA CPI rose to 4.5% yoy in April, from 3.8% in March (better than consensus). The higher inflation rate was seen almost across the board, as a result of the 1% increase in VAT. Retailers have not passed the full increase in the VAT rate onto consumers. Disinflationary pressures remain, particularly in the food basket, muting the effect of the increased VAT rate somewhat. Apart from transport inflation which remains an upside risk to inflation, most upside pressures remain fairly contained in our opinion. We expect inflation to remain contained around the 5% level over the medium-term.

·        The SARB kept the repo rate unchanged at 6.5%, in-line with our expectations and the consensus view. The inflation profile remains largely unchanged. Growth for 2018 was left unchanged at 1.7%, but revised marginally higher (from 1.5%) to 1.7% for 2019. Next year still sees a negative output gap according to the SARB of -0.4% (from -0.6% previously), but the gap is seen to close at a slightly faster pace. The output gap is seen turning marginally positive in 2020 (0.1%).

·        The SA bond market has been violently affected by the global risk aversion in May, with yields rising across the curve. As a result, the SA yield curve has seen a parallel shift higher in the past month. Combined with rising US treasury yields, a sharply stronger dollar, political change in Italy and prospects for an ‘Italexit’ from the Eurozone, has sparked significant volatility in EM assets as well as some contagion within EMs as foreign investors sold off EM assets. However, despite the outflow of foreign capital from SA, the weakness in the rand was limited to just 0.52% over the past month.