Executive Summary

·    SA’s GDP growth slumped yet again in 2Q18, contracting by 0.7% quarter-on-quarter (SAAR), versus a contraction of 2.6% in 1Q (revised from -2.2%), worse than consensus of +0.6%. Given the substantial drawdown in inventories in 2Q, we could see a seasonal uptick of inventories in 3Q, ahead of the peak shopping season in 4Q. Manufacturing output may drive trade and transport activity in 3Q, while supporting financial and business services. In 4Q, we expect household spending to do much of the heavy lifting, driving activity across most industries. The Nedbank Group Economic Unit has revised growth estimates to 0.6% for 2018 and 1.6% for 2019, following this GDP disappointment.

·   SA’s CPI inflation eased to 4.9% year-on-year in August, from 5.1% in July, better than consensus of 5.2%. Our headline inflation forecast has risen over the past month as a result of the weaker rand shock materialising. However, we maintain an inflation profile that is slightly less hawkish than the SARB’s, with CPI inflation estimates of 4.7%, 5.7% and 5.4% for 2018, 2019 and 2020, respectively. Our core inflation estimates remain far below the SARB’s at 4.3%, 4.6% and 4.7% for the three years respectively. We believe that the rand pass-through is much lower in this weak demand environment and that it should limit a surge in core inflation, unless growth rises above its potential. We believe that the bias for a hike sooner rather than later has risen due to the elevated CPI profile that the SARB thinks will materialise. However, this is contingent on a weaker rand and high oil prices translating into higher fuel costs and, ultimately, higher consumer prices in 2019.

·   President Ramaphosa outlined a stimulus package in September that aims to kick-start the economy by reprioritising the current expenditure mix to target growth- and employment-generating projects. The key aim of the package is to improve implementation using existing resources. It is positive that the drive for successful implementation of all these goals is coming directly from the president. In terms of growth, however, we may be able to see the impact of this package only in hindsight. It would depend on the speed and efficacy of implementing many of the promised projects in the plan.

·   The USDZAR strengthened by almost 4% in September as risk sentiment improved and the US dollar weakened. However, the rand was quite volatile in the interim, weakening above R15.50/USD, but coming back sharply as risk sentiment towards emerging markets improved and volatility eased. A break below the R14.00/USD level would target the R13.80/USD mark in the near term. At current levels, the rand is assessed as being at fair value – any resurgence in rand weakness, or strength for that matter, would imply a greater deviation away from our fair value estimates. We currently estimate that the USDZAR will recover modestly in the near term but end the year close to, if not marginally above, the R14.00/USD level as trade uncertainty picks up, EM risks remain on the radar, and local issues remain unresolved.