South Africa’s private consumption to weaken at faster pace in 2016, GDP growth to rebound slowly in 2017

The South African economy continues to struggle with the aftermath of the decline in commodity prices. The country’s real GDP growth declined in Q4 2015 to 0.6% y/y, the slowest pace in 18 years against the backdrop of weak domestic demand and net exports. Consumer confidence in South Africa is very weak, although private consumption and retail sales have been relatively strong so far.

“We think that private consumption will start to weaken at a faster rate and expect real GDP growth to slow to 0.9% in 2016 and only recover slowly to 1.5% in 2017”, says Danske Bank.

Meanwhile, the country’s terms of trade is recovering on the back of higher gold prices. The doubtfulness regarding the future of South Africa’s Finance Minister Gordhan increases concerns about the country’s future policy path.

The argument between the finance minister and the tax agency and the police in recent times brings up the question regarding how much support the finance minister has from President Zuma. It also raises the question to what degree can the finance minister deliver on fiscal consolidation and the structural reforms required to avert a rating downgrade to junk.

Meanwhile, South Africa’s central bank faces a tough task in curbing inflation pressures amidst an oncoming recession. On 17 March, the SARB raised its key rate to 7% given the acceleration in headline inflation above the upper end of the inflation target range due to food price pressures and a passthrough from the weaker ZAR.

A relatively stable rand and weakness in economy might mitigate inflation pressures in South Africa, going forward. The central bank, therefore, is likely to keep its policy on hold for some time and closely observe inflationary developments before changing the key rate again.

Meanwhile, the rand has appreciated against the US dollar since mid-January in spite of domestic uncertainty and weak global risk sentiment. In the coming months, the ZAR will be weighed on by political uncertainty and possible downgrade of the rating; however, it might be neutralized by the impact a more dovish Fed and increasing commodity prices. ZAR is expected to strengthen in the medium term as it is fundamentally undervalued after several years of weakening.

“We forecast the USD/ZAR to trade slightly around 15.30 in 3-6M and then strengthen somewhat to 15.00 in 12M. However, we caution the outlook is very uncertain given political risks”, says Danske Bank.