South Africa: Recovery already waning - Capital Economics
Africa Economics

South Africa: Recovery already waning

Africa Economics Update
Written by Virag Forizs

Despite the slight improvement in the manufacturing sector, the batch of activity figures for July suggests that South Africa’s economic recovery in Q2 faded at the start of Q3. This adds to reasons to think that the Reserve Bank will cut its key policy rate from 6.50% to 6.25% next week.

  • Despite the slight improvement in the manufacturing sector, the batch of activity figures for July suggests that South Africa’s economic recovery in Q2 faded at the start of Q3. This adds to reasons to think that the Reserve Bank will cut its key policy rate from 6.50% to 6.25% next week.
  • The mining figures released today point to renewed weakness in the sector. After relatively strong readings in recent months, mining output dropped by 3.8% m/m in July. (See Chart 1.) Both iron and coal production, the main drivers behind the recent upturn, weakened.
  • While manufacturing production ticked up, the level of output is still below its Q1 trough. (See Chart 2.) Manufacturing production was up by 0.4% m/m from June’s output level, but that was the lowest in ten months. In seasonally adjusted terms, output contracted by 1.4% q/q in July compared to growth of 0.6% q/q in June.
  • More timely figures suggest that the rise in manufacturing output between June and July may have been a blip. The manufacturing PMI tumbled from 52.1 in July to 45.7 last month. And the South African Chamber of Commerce and Industry’s business confidence index dropped to a 34-year low in August. (See Chart 3.)
  • Reduced availability of electricity may have dampened business activity across the economy. Total electricity generation fell in July, although output levels still remained above those seen during periods of significant load shedding. (See Chart 4.)
  • Retail sales figures for July are due to be released next week, and will provide a clearer picture about the state of South Africa’s economy at the start of Q3. But the hard activity and survey figures published so far suggest that the country’s recovery in Q2, when output rose by 3.1% q/q saar, did not last into Q3.
  • Taken together, this strengthens our view that policymakers at the South African Reserve Bank will cut their benchmark rate by 25bp next week, from 6.50% to 6.25%.

Chart 1: Mining Production
(Index, 100 = 2015 Average, Seasonally Adjusted)

Chart 2: Manufacturing Production
(Index, 100 = 2015 Average, Seasonally Adjusted)

Chart 3: SACCI Business Confidence Index

Chart 4: Total Energy Output (GWh per month)

Sources: Stats SA, SACCI, Capital Economics


Virág Fórizs, Emerging Markets Economist, +44 20 7808 4079, virag.forizs@capitaleconomics.com