Executive Summary

  • Last month, we noted an uptick in headline global inflationary pressures that was not mirrored by a rise in core or underlying inflation.However, core inflation edged higher in April in both the US and the Eurozone, while core CPI in the UK remained elevated.The Easter holiday shopping season played a key role in boosting prices of services and other discretionary products, increasing core inflation. This may prove to be a temporary feature if global growth remains weak.


  • Trade tensions between the US and China escalated in May, with both countries imposing retaliatory tariffs on imports. The IMF has warned that the additional tariffs would reduce global growth by 30bps in the short term (currently forecast at 3.3% for 2019). From the IMF and the World Bank to the OECD and the SARB, SA’s growth estimates have been slashed. Come the MTBPS in October 2019, we expect the same from the NT, which currently projects real GDP growth of 1.5% and 1.7% for 2019 and 2020, respectively. The Nedbank Group Economic Unit currently forecasts growth of 0.8% for 2019 and 1.6% for 2020, with risks to the outlook still firmly on the downside. The OECD reduced SA’s growth forecasts to 1.2% for 2019 (prev. 1.7%) and 1.7% for 2020 (prev. 2.0%).


  • SA CPI declined to 4.4% y/y in April from 4.5% in March, below consensus of 4.5%.Core inflation slumped to 4.1% y/y from 4.4% previously. The downside surprise in CPI reflects the weak pricing power of business in the face of a very weak consumer base. We also see the (still limited) effect of the VAT hike that was initiated a year ago working itself into the CPI base, keeping price increases limited, despite a weaker rand exchange rate and higher import costs. This has resulted in a downward revision of our CPI estimate to 4.7% (average for 2019) from 4.9% previously. The estimate for 2020 remains unchanged at 5.3%. We expect CPI to rise gradually in the coming months as a result of a volatile rand exchange rate and an unpredictable international oil price. The full adjustment to the electricity tariff will kick in on 1 July 2019 (9.4% + 4.4%), affecting utility costs in the whole economy to a greater extent.


  • While risks to the growth outlook remain to the downside, risks to the inflation outlook remain balanced. While the SARB seems to be on track to achieve its 4.5% CPI target in 2019, it has warned that the MPC would like to see inflation remain close to the midpoint of the target range on a more sustained basis. We read this as the 2020 CPI print needs to drop more for the MPC to consider easing monetary policy further. We, therefore, maintain our view for flat interest rates in the interim, with the possibility of a 25bps reduction towards year-end or early 2020.


  • The USDZAR weakened by 2.1% in May. While risk sentiment remained downbeat as a result of geopolitical tensions, a key reason for the weakness stemmed from a technical rebalancing of the MSCI EM equity index, which increased the weight of Chinese A shares in the index, reducing SA’s weight and necessitating outflows from index-tracking funds.