S. Africa: Worsening outbreak will prompt SARB to cut - Capital Economics
Africa Economics

S. Africa: Worsening outbreak will prompt SARB to cut

Africa Economics Update
Written by Virag Forizs

Activity data from January suggest that the economy was already contracting before the coronavirus reached South Africa. The outbreak will add to economic headwinds. Policymakers are likely to spring into action by cutting their key rate on Thursday, but that will not prevent GDP from falling this year.

  • Activity data from January suggest that the economy was already contracting before the coronavirus reached South Africa. The outbreak will add to economic headwinds. Policymakers are likely to spring into action by cutting their key rate on Thursday, but that will not prevent GDP from falling this year.
  • Data released today showed that retail sales grew by 0.9% m/m in January, after a fall of 3.2% m/m in December. Other sectors also performed better at the start of this year. (See Chart 1.) Even so, our GDP Tracker suggests that the economy continued to shrink in the three months to January. (See Chart 2.)
  • Given the worsening coronavirus outbreak both in Europe and within South Africa itself, conditions have clearly deteriorated since then. Cinema ticket sales suggest that South Africans have already started to avoid public spaces. (See Chart 3.) And the declaration of a ‘state of disaster’ on Sunday will probably urge more people to stay at home, dampening economic activity. The tourism sector, which accounts for 3% of GDP, will contract sharply. Lower commodity prices will also deal a severe blow to the mining sector.
  • We expect an even deeper fall in activity in Q2. The rapid pace of developments makes it difficult to forecast with any degree of certainty. However, assuming that tourist arrivals fall sharply and domestic consumers’ delay non-essential purchases, we estimate that output will probably contract by around 10% q/q saar before rebounding later. We’ve cut our full-year forecast to a fall of about 3%. (We will outline all of our latest Africa forecasts in a forthcoming Update.)
  • Given the government’s weak fiscal position and rising debt burden, policy support will come from monetary easing; we expect that the SARB will follow other central banks by loosening policy, cutting its key rate from 6.25% to 5.75% on Thursday. Further easing is likely. Inflation remained near the centre of the target range in February, and will probably remain within target until the end of the year. (See Chart 4.)

Chart 1: Activity Data (% m/m)

Chart 2: GDP & CE GDP Tracker

Chart 3: Box Office Receipts (ZAR, % y/y)

Chart 4: Consumer Prices & Key Policy Rate

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


Virág Fórizs, Emerging Markets Economist, virag.forizs@capitaleconomics.com