Executive Summary

·        There were a few bright spots in the economy in recent months – even though the manufacturing PMI declined further in May and June, actual manufacturing production growth did rebound in May, while trade activity improved sharply in 2Q18 relative to 1Q18. While it does look like SA GDP growth may improve in Q2 after the deep contraction in Q1, there is a risk of disappointment if the improvement in the high-frequency data-prints (mentioned above) prove to be a one-off occurrence in May. We therefore remain cautious on growth, especially amid global trade uncertainty.

·        The overall outlook for growth remains fairly benign. Due to downside risks to growth from increased trade tensions, Nedbank Group Economic Unit has downgraded the 2018 GDP growth forecast to 1%, from 1.5% previously anticipated. Growth estimates for 2019 and 2020 are 1.8% and 2.2% from 1.9% and 2.4% previously forecast.

·        After depreciating by more than 14% in the previous three months, the rand posted significant gains in July, appreciating by 5.5% against the US dollar, despite the dollar index remaining fairly range-bound and resilient through the month. The rand appreciated by 4.7% against a trade-weighted basket of currencies in July. The USDZAR is testing its 50-day moving average, and has tentatively broken below this level. A sustained break below this level provides significant momentum for further rand strength; however we remain cautious at this point, given a barrage of global developments which could easily derail a positive rand trend.

·        The recent announcement by the ANC to pursue a change of the Constitution to make land expropriation without compensation more explicit is likely to weigh on the currency and cap significant rand strength. Land reform will remain a dominant feature in our local economy over the next two months. Ratings agencies will be watching amendments closely.

·        We remain relatively dovish on inflation over the medium term. We have incorporated a possible Eskom RCA claw back taking effect in July 2019 into our inflation estimates, and we now forecast average headline CPI at 4.6%, 5.1% and 5.2% for 2018-2020, with the bulk of the impact of higher electricity tariffs occurring in 2020 and 2021.

·        We expected a hawkish statement and the MPC delivered exactly that. The SARB kept interest rates unchanged at 6.5%, but raised its inflation forecasts sharply, and lowered its growth estimate, with less of a concern over growth. Even if the SARB were to maintain its hawkish rhetoric in September, we don’t think that there will be a chance to raise interest rates as yet – we believe rates may be kept on hold over the next 12 months as inflation is likely to continue surprising to the downside relative to the SARB’s very hawkish inflation estimates.