Executive Summary

  • Inflationary pressures picked up in March and April due to higher energy costs in the West and elevated food inflation in some Asian countries. In its latest World Economic Outlook (WEO) release, the IMF revised its global growth projection down to 3.3% for 2019 from 3.5% previously, predominantly as a result of a sharp downward revision to global trade growth and lower DM growth.
  • The outlook for SA’s growth in 2019 has deteriorated on the back of severe electricity outages and a much weaker secondary-sector performance. High-frequency data prints for the first two months of the year show deep contractions in the mining, manufacturing, utilities, trade and agricultural industries. Furthermore, weak domestic demand is reflected in a sharp fall in vehicle sales and the commensurate easing in instalment sales credit, and a PMI that remains stubbornly below the 50-point mark. The Nedbank Group Economic Unit forecasts a contraction of 1.3% q/q in 1Q as a result of these factors (previously: -0.4% q/q). The bias to the growth outlook is still firmly to the downside, as Nedbank forecasts growth of just 0.9% in 2019.
  • While we still expect a gradual uptick in headline CPI in the coming months, to average 4.9% this year, there are a few upside risks to inflation on the horizon that one needs to consider:global risk sentiment and a volatile rand exchange rate; the possibility of an El Niño event inducing a drought in the latter part of the year; increasing global oil prices; and local administered inflation remaining elevated. Overall, we believe inflation is likely to remain contained below 6% for the foreseeable future in the absence of a severe drought. Based on the last MPC statement, we believe the SARB is likely to be on hold for some time, especially given the MPC’s approach “to focus on the possible second-round effects of supply-side shocks”. That said, although we believe the SARB will keep its policy stance unchanged for more than 12 months, we argue that should the SARB eventually move, the bias has shifted to this move being a cut rather than a hike.
  • After the 3.6% decline in the USDZAR in March, its April performance was more muted, with the rand weakening by 1.2% against the USD, 1.5% against the EUR and 0.9% against the GBP. For the YTD, the trade-weighted rand is 0.22% stronger. The main reasons for the underwhelming performance were a sudden shift in market sentiment as global growth became less of a concern after the US and Eurozone GDP surprises; a shift in the Fed’s language, with fewer dovish hints; and markets in a holding pattern as investors fail to commit to a direction ahead of the crucial elections. Historical evidence suggests that the rand tends to strengthen three months before the general elections and to weaken one month before them; notably, it resumes its strengthening bias within one month after elections. However, given that SA’s growth outlook remains subdued and the SARB’s monetary policy is likely to be neutral to dovish, combined with slowing global growth and a resilient USD, we believe the rand will not strengthen significantly like in previous election cycles. We maintain the view that the rand trading between 14.00 and 14.50 reflects better local and external risks.