More signs of a bumpy recovery in South Africa - Capital Economics
Africa Economics

More signs of a bumpy recovery in South Africa

Africa Economics Update
Written by Virag Forizs

Activity data released today suggest that the pace of South Africa’s economic recovery had already started to slow in July. Taken together with a terrible Q2 GDP outturn, we think that this will give more impetus for the central bank to cut interest rates further, a view that investors are coming around to.

  • Activity data released today suggest that the pace of South Africa’s economic recovery had already started to slow in July. Taken together with a terrible Q2 GDP outturn, we think that this will give more impetus for the central bank to cut interest rates further, a view that investors are coming around to.
  • Hard activity data published by Stats SA today showed that manufacturing production rose by 7.6% m/m in July, which was markedly slower compared to a 17.9% m/m expansion in June. Mining output surged by 20.2% m/m in July, but that followed a 1.9% m/m contraction in June. These followed electricity generation figures (released last week), which showed that production grew by just 1.3% m/m in July.
  • In both the manufacturing and mining sectors, output remained almost 10% below pre-virus levels in July. (See Charts 1 & 2.) What’s more, the manufacturing and electricity data suggest that the pace of South Africa’s economic recovery started to level off in July. And high-frequency mobility data on visits to retailers and workplaces (among others) show a similar pattern of activity barely inching up in recent weeks.
  • As we noted before, evidence of the recovery stumbling is likely to provide more reason for the South African Reserve Bank to ease monetary policy further. Investors seem to be coming around to our view, market pricing has shifted to price in a further 25bp rate cut by the end of this year.
  • Admittedly, the swing in the current account balance from a 1.2% of GDP surplus in Q1 to a 2.4% of GDP deficit in Q2 (see Chart 3) might – at face value – make policymakers more cautious out of concerns about the rand. But the Q2 outturn was probably driven by one-off factors related to the country’s stringent lockdown, which caused exports to tumble by more than imports. More recent trade figures show that exports have recovered. (See Chart 4.) Taken together with the continued weakness of imports, a sign of subdued domestic demand, the current account has probably shifted back to surplus.
  • Today’s figures support our long-held view that the Reserve Bank will lower rates further. We’ve pencilled in 50bp of additional cuts in the policy rate by year-end (including a 25bp cut next week), to 3.00%.

Chart 1: Manufacturing Production Index (2015=100)

Chart 2: Mining Production Index* (2015=100)

Chart 3: Current Account Balance (% of GDP)

Chart 4: Exports & Imports (ZAR terms, % y/y)

Sources: SARB, Stats SA, Refinitiv, CEIC, Capital Economics


Virág Fórizs, Africa Economist, virag.forizs@capitaleconomics.com