Headwinds Growing For Economy

BMI View: We are below-consensus, forecasting that South Africa's economy will growth by just 2.5% in 2014 (versus Bloomberg consensus of 3.0%). Our view is predicated on several concerning factors including the slowdown in China and ongoing retrenchment in the domestic gold mining sector.

The prospects for South Africa's economy are deteriorating and we have revised down our forecasts since our last quarterly update. Previously, we were forecasting real GDP growth of 2.3% in 2013 and we have since adjusted this marginally to 2.2%. For 2014, however, we have made a more substantial revision from 3.3% to 2.5%. This places us right at the bottom of the range of forecasts collated by Bloomberg, and we are significantly below consensus, which currently stands at 3.0%.

Several factors bode ill for growth: lower gold prices, an associated retrenchment in the mining industry, strike activity, the slowdown in China and the likelihood of higher interest rates. On a more positive note, the consumer sector is broadly holding up and the manufacturing sector is gaining some tailwinds from the weak rand which makes exports more competitive abroad. Overall, however, we believe that growth will remain fairly lacklustre over the medium term, averaging around 3.0% over the next five years.

Bearish Forecasts
South Africa - Bloomberg Consensus Forecasts For Real GDP Growth, %

BMI View: We are below-consensus, forecasting that South Africa's economy will growth by just 2.5% in 2014 (versus Bloomberg consensus of 3.0%). Our view is predicated on several concerning factors including the slowdown in China and ongoing retrenchment in the domestic gold mining sector.

The prospects for South Africa's economy are deteriorating and we have revised down our forecasts since our last quarterly update. Previously, we were forecasting real GDP growth of 2.3% in 2013 and we have since adjusted this marginally to 2.2%. For 2014, however, we have made a more substantial revision from 3.3% to 2.5%. This places us right at the bottom of the range of forecasts collated by Bloomberg, and we are significantly below consensus, which currently stands at 3.0%.

Bearish Forecasts
South Africa - Bloomberg Consensus Forecasts For Real GDP Growth, %

Several factors bode ill for growth: lower gold prices, an associated retrenchment in the mining industry, strike activity, the slowdown in China and the likelihood of higher interest rates. On a more positive note, the consumer sector is broadly holding up and the manufacturing sector is gaining some tailwinds from the weak rand which makes exports more competitive abroad. Overall, however, we believe that growth will remain fairly lacklustre over the medium term, averaging around 3.0% over the next five years.

A Slow Recovery
South Africa - Real GDP Growth, % and Components' Contribution, pp

Expenditure Breakdown

Private Consumption Outlook: The consumer sector has been a key driver of the recovery seen since the global financial crisis, and although growth slowed down over the course of 2012, it has remained positive, in the 2.0-3.0% region in recent quarters (at a seasonally adjusted and annualised rate (SAAR)). Boding well for spending, the latest Consumer Confidence Index reading from the Bureau of Economic Research showed a rebound to +1 in Q213, from -7 in Q113, and household credit growth remained elevated at 8.8% year-on-year (y-o-y) in June.

Consumer Sector Not Stellar But Holding Up
South Africa - Retail Sales & Credit To Private Households, % y-o-y 3mma

Furthermore, ongoing wage bargaining resulting in high nominal wage increases should support spending. Accordingly, we forecast that private consumption will remain in the 2.0-3.0% area, at 2.4% in 2013 and 2.2% in 2014. The dip in 2014 is predicated on the expectation that interest rates will be hiked in response to rising inflation, which in turn stems from rand weakness. Our core scenario is for the repo rate to be hiked by 50 basis points in early 2014, taking the policy rate to 5.50%. Spending is likely to weaken as indebted consumers feel the pressure of higher rates.

Real GDP Growth, % chg q-o-q, SAAR
Household Expenditure Government Expenditure Gross Fixed Capital Formation Exports Imports Total GDP
Source: South African Reserve Bank; BMI
Q311 3.2 4.8 6.8 8.0 18.5 1.9
Q411 4.4 7.8 7.3 4.4 11.0 3.3
Q112 4.0 1.9 4.6 -3.0 4.8 2.5
Q212 3.2 3.7 5.4 -6.1 -0.5 3.4
Q312 2.7 8.3 5.6 1.6 12.0 1.2
Q412 2.4 -0.7 4.3 -4.3 -12.4 2.1
Q113 2.3 3.0 2.5 29.5 32.5 0.9
Q213 2.5 2.1 2.7 4.2 2.7 3.0

Government Spending Outlook: As regards government spending, we hold a relatively upbeat view, forecasting real growth of 3.5% in 2013. The National Treasury is proactively nurturing the economic recovery, withdrawing fiscal stimulus gradually and tolerating a fiscal deficit over the medium term. The budget presented in February 2013 illustrates this: the finance ministry intends to run fiscal deficits equaling 4.6% of GDP in fiscal year 2013/14 and 3.9% of GDP in 2014/15, in line with its 'gradual fiscal consolidation' policy. The public sector is proving a key driver of job creation in the current climate, helping to boost consumer spending and keep unemployment under control - although joblessness remains high, recorded at 25.6% in Q213.

Investment Outlook: The trajectory for investment is less positive: we are forecasting real growth of just 2.6% in 2013 following 5.7% in 2012. Our view is predicated on the likelihood of global risk appetite remaining weak amid a 'muddle-through' in the eurozone and a continued slowdown in China. South Africa's manufacturing sector is particularly vulnerable in this regard, given its reliance on external demand - although as mentioned, the weakness of the rand is giving a timely boost to competitiveness. We have also factored in tainted foreign investor perceptions in the aftermath of the Marikana Massacre and subsequent bouts of industrial unrest. Furthermore, the latest data on business confidence from the South African Chamber of Commerce and Industry indicate that domestic investment will likely cool: the business confidence index stood at 90.5 in August 2013 (based to 2010 = 100) and remained depressed compared with pre-global financial crisis levels.

Confidence At A Low Ebb
South Africa - Business Confidence Index, 2010 = 100

Net Exports Outlook: We see the overall impact of net exports being negative: exports will likely see weak growth at best, but we also expect imports to remain elevated, having a deleterious impact on headline real GDP growth.

Looking first at exports of goods and services, the prospects for gold are notably weak. BMI's Mining analysts forecast that gold production will contract in 2013 and 2014, by 8.1% and 1.1% respectively owing to a combination of low gold prices and labour unrest (see 'Mining Outlook Deteriorates For South Africa', August 29). Meanwhile for coal - which accounts for the majority of the mining sector's value - the outlook is more positive. Our Mining analysts forecast production reaching 284mn tones by 2017, marking average annual growth of 2.4%. This is particularly important as it comes at a time of tight global coal supplies. Iron ore is also notable: the sector is set for significant expansion over the long term, driven primarily by Kumba Iron Ore (majority-owned by Anglo American). For this metal, we expect output to reach 77mnt in 2017, from current levels of around 71mnt. However, given aggressive expansion plans in the west of the continent, it is possible that over the long term, South Africa could be usurped by Guinea as Africa's largest iron ore producer.

Turning to imports of goods and services, we are forecasting real growth of 4.0% in 2013, which would be a notable slowdown from the 6.3% growth seen in 2012. In our view, the weakness of the rand will keep import costs elevated, weighing on demand somewhat. Furthermore, the aforementioned slowdown in the growth of investment spending will also likely keep a lid on import growth.

SOUTH AFRICA - ECONOMIC ACTIVITY
2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f
Notes: e BMI estimates. f BMI forecasts. Sources: 1 South African Reserve Bank/BMI calculations; 2 World Bank/UN/BMI; 3 Statistics South Africa/BMI.
Nominal GDP, ZARbn 1 2,256.5 2,406.4 2,659.4 2,917.5 3,155.2 3,387.5 3,689.1 4,014.1 4,354.2 4,719.9
Nominal GDP, US$bn 1 272.8 285.9 363.3 401.7 384.4 361.2 363.5 433.4 526.6 589.5
Real GDP growth, % change y-o-y 1 3.6 -1.5 3.1 3.5 2.5 2.2 2.5 3.0 3.1 3.3
GDP per capita, US$ 1 5,427 5,618 7,061 7,733 e 7,338 e 6,844 6,840 8,102 9,782 10,883
Population, mn 2 50.3 50.9 51.5 51.9 e 52.4 e 52.8 53.1 53.5 53.8 54.2
Unemployment, % of labour force, eop 3 21.9 24.3 24.0 23.9 24.9 e 25.5 25.0 24.5 24.0 23.5

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This article is tagged to:
Sector: Country Risk
Geography: South Africa, South Africa, South Africa, South Africa, South Africa
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