Executive Summary

  • The World Bank reduced its growth forecasts in June due to the trade conflict between the US and China – between them, the two countries account for more than a third of global economic activity. Global growth is now forecast at just 2.6% for 2019 from 2.9% previously forecast. The Fed has turned sharply dovish as a result of sluggishly low inflation, threats to the growth outlook due to weaker global trade and geopolitical tensions from the trade war. Wage pressures remain muted and unable to boost inflation, while the threat of a recession mounts. The Fed’s dot plot is now pricing in a reduction in interest rates by year-end, and a further reduction in 2020, with the long-term Fed funds target rate falling to 2.5% from 2.75% previously.
  • SA’s GDP posted its biggest quarterly contraction since 1Q09 in 1Q – 3.2% q/q versus 1.4% growth in the previous quarter. High-frequency economic data for 2Q shows somewhat of a recovery, with manufacturing output sharply higher, while retail sales were boosted by Easter spending in April. While Nedbank expects 2Q real growth of 1.6% q/q, this would evolve based on high-frequency monthly data. With no real uptick in confidence expected in 2H19, we could see very subdued levels of growth, with any load-shedding exacerbating this decline. Conversely, fast-tracking structural reforms could lend some upside, but there would be a lagged effect, taking these benefits into 2020, in our opinion.
  • While risks to the growth outlook remain to the downside, risks to the inflation outlook remain balanced. Although 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 could see a marginal reduction in the SARB’s CPI and growth forecasts at its upcoming MPC meeting that could prompt a more dovish monetary policy stance. We, therefore, believe there is a high likelihood of a SARB rate cut this month.
  • The USDZAR appreciated by 3.4% in June as risk sentiment improved amid expectations of looser monetary policy in the US and the Eurozone. A temporary trade truce between the US and China at the G20 meeting also aided the rand and other EM FX as the JP Morgan EM FX Index appreciated by 2.4% in June.
  • Moody’s released a credit opinion on SA’s sovereign credit rating after the presidential inauguration and the announcement of the new Cabinet. Importantly, Moody’s hinges its rating trajectory for the sovereign on potential structural reform that could raise potential growth. However, all rating agencies have been warning of the hazards of not implementing structural reform for the better part of the past five years. We believe there is a high likelihood of a Moody’s outlook change to ‘negative’ from the current ‘stable’, after the MTBPS. Further growth disappointments would also weigh on the rating and the outlook over the medium term. In the absence of a solid improvement in growth projections, we believe Moody’s Baa3 (stable) credit rating of SA’s LT FC and LC debt will be reduced to non-investment grade within the next 12 months.
MonthlyInsights_July 2019