Momentum continued to wane into the second quarter as the anticipated “Ramaphoria”-driven liftoff of the domestic economy failed to materialize. Although economy-wide sentiment got a boost from Cyril Ramaphosa’s appointment to the country’s top post earlier in the year, employment gains have been muted since, while consumer-spending metrics have deteriorated. Moreover, manufacturing output has stumbled in recent months and survey-based data points to sluggishness across the private sector. On the external front, the ongoing global risk-off sent the rand into a freefall in early August and looks bound to fan inflationary pressures over the coming months. Meanwhile, a quarter-on-quarter contraction in the first quarter—held back by a fall in investment and moderating household spending—highlights the economic hurdles facing Ramaphosa as next year’s general election looms. 

• Full-year growth prospects have taken a hit from weak early-year readings, but greater political stability and firm credit ratings should help the economy ride out the remainder of the year with reasonable growth metrics. On the domestic side, real wage gains should support stronger household spending this year while the government’s push to attract investment should bolster capital outlays. On the other hand, fiscal slippage and a slow reform agenda are likely to constrain growth over the medium term. FocusEconomics analysts expect growth of 1.5% in 2018, down 0.1 percentage points from last month’s forecast, and 2.0% in 2019. 

• Inflation climbed to 4.6% in June (May: 4.4%) on growing pass-through pressures from the weak rand, and higher global oil prices are expected to keep it elevated through the remainder of the year. FocusEconomics analysts see inflation averaging 4.7% in 2018 and 5.1% in 2019. • On 19 July, the South African Reserve Bank (SARB) kept the repurchase rate unchanged at 6.50%, in line with market expectations. Officials, however, took a more hawkish stance in the face of the global risk selloff’s pressure on the rand, making clear that a rate hike could be on the table before year-end should it fuel inflationary pressures. That said, a majority of FocusEconomics analysts see the SARB staying put over the short term in an effort to spur economic growth. Consensus is for the repurchase rate to end this year at 6.53% and 2019 at 6.64%. 

• On 17 August, the ZAR traded at 14.78 per USD, 11.8% weaker than on the same day last month as contagion from Turkey’s lira crisis spread to the rand. Investors have fled the currency over concerns about the economy’s dollar-denominated debt. Despite the prospect of further riskoff this year amid mounting global trade fears, still-solid fundamentals look set to cushion the rand. The rand is seen ending this year and next year at 13.27 and 13.06 per USD, respectively.

Analysis from Focus Economics

• The economic recovery is gathering pace mostly due to OPEC’s decision to increase oil production in order to keep markets adequately supplied and high oil prices, which have stoked activity in the all-important oil sector. Moreover, the recovery is broadening as the impact of the VAT implemented in January fades, and gains from the recovery in the oilsector are slowly trickling down to the rest of the economy. The nonhydrocarbon PMI hit a six-month high in June, while credit growth and foreign reserves improved in Q2. Higher production and oil prices are also translating into an improvement in the government’s fiscal position and the current account balance, which recorded a healthy surplus in Q1. On the flip side, the government’s Saudization policy, which is expelling foreign workers, could create labor shortages in some sectors, while the crackdown on corruption implemented last year is deterring investment and spurring capital outflows. Rising oil production and higher prices for the black gold will fuel this year’s economic recovery. However, the VAT implementation that disrupted activity at the outset of the year, persistent regional threats and domestic political unrest will weigh on growth this year. FocusEconomics Consensus Forecast panelists expect growth of 1.7% in 2018, which is up 0.1 percentage points from last month’s projection. In 2019, growth is seen picking up pace to 2.3%. Inflation fell from 2.3% in May to 2.4% in June. A relatively strong currency and firms cutting prices to spur sales are exerting downward pressure on inflation. Panelists project that inflation will average 3.3% in 2018 before moderating to an average of 2.4% in 2019. The riyal has been officially pegged to the U.S. dollar at a rate of 3.75 SAR per USD since January 2003. That said, the currency has had a de facto peg to the greenback since 1986. To defend the currency peg against the USD, the Saudi Arabian Monetary Authority hiked its repo and reverse repo rates by 25 basis points on 13 June following a similar decision by the U.S. Federal Reserve on the same day. Our panelists do not foresee a change in the current exchange rate system during the entire forecast horizon, which ends in 2022.

REAL SECTOR | Non-oil PMI jumps to six-month high in June The Purchasing Managers’ Index (PMI) sponsored by Emirates NBD and produced by IHS Markit rose from 53.2 in May to 55.0 in June. June’s print represented the highest reading so far this year. Therefore, the index remains above the 50-threshold that indicates expansion in business activity in the non-oil private sector. June’s increase was driven by stronger output growth and a healthy expansion in new orders. Solid growth momentum translated into higher backlogs of work. Despite the overall improvement, job creation increased only marginally. On the price front, higher prices for raw material boosted input prices faced by Saudi companies. That said, output charge inflation declined due promotional activities in June.

“The rise in the headline PMI to the highest level this year reflects a strong recovery in new orders (including export orders) and output. Firms had been anticipating this for several months, as reflected in the very strong ‘future output’ readings since February. It isn’t surprising then that the future output index declined sharply in June, with most firms now expecting their output to be relatively stable over the next twelve months.”

- Khatija Haque, Head of MENA Research at Emirates NBD

Oil is back in a big way - investments are picking up and many are going deep. The current US administration is heavy on fossil fuels and that has reinvigorated supply and demand. Of course the tariffs send a message counterproductive to this. It’s hard to think about how many oil and gas exports we are missing out on because of the tariff scare.

- Chad Hagan

"Increased supply pushed oil prices down over the past three weeks"

+ Despite somewhat stronger global demand expectations, a perceived loosening in supply led to a fall in oil prices over the past three weeks. In 2018:Q2, increasing demand expectations and decreasing anticipated supply led to rising oil prices.

+ Developments in global demand expectations since 2017:Q3 have reversed the largely supply-induced weakness in oil prices throughout the first half of 2017

+ Overall, since the end of 2014:Q2, both lower global demand expectations and looser supply have held oil prices down, though this trend seems to have reversed in 2016:Q2 and 2016:Q4, and notably since 2017:Q3.

See Link To Report

Ukraine’s recovery appears to have persisted in the second quarter, after growth picked up at the outset of the year. Domestic demand is expected to have remained in the driver’s seat in Q2: The sustained easing of inflationary pressures, coupled with improving labor market dynamics and strong remittance inflows, likely buttressed private consumption. In addition, household lending surged in the first half of the year against an increasingly stable banking sector. Meanwhile, the IMF has backed the country’s revised plans for an anti-corruption court after the amended law was approved by the Rada on 12 July. On a less positive note, in a move likely influenced by next year’s presidential and parliamentary elections, the government recently extended the gas-price freeze until the beginning of September, once again failing to fulfill one of the Fund’s key conditions and thereby reducing the prospects of receiving another tranche of funding in the coming months. • Domestic demand should remain healthy and lead the sustained recovery this year amid heavy investment activity and robust household consumption growth. Nevertheless, downside risks are significant and stem from mounting political tensions domestically and slow reform momentum. FocusEconomics panelists see GDP rising 3.1% in 2018, unchanged from last month’s forecast, and 3.1% again in 2019. • Inflationary pressures continued to ease throughout the second quarter, with inflation down to 9.9% in June from 11.7% in May, marking the lowest reading since September 2016. Our panelists expect inflation to remain elevated amid firm energy prices and recovering domestic demand. Inflation is seen closing 2018 at 9.3% and dropping to 7.2% by the end of 2019. • At its 12 July meeting, the National Bank of Ukraine unexpectedly hiked the key policy rate by 50 basis points to 17.50%. The decision came against the backdrop of heightened upside risks to short- and mediumterm inflation and elevated inflation expectations; a further rate hike in the second half of the year is unlikely. Our panelists forecast the rate to end 2018 at 16.30% and 2019 at 13.67%. • The hryvnia exhibited some weakness against the U.S. dollar in recent weeks. On 27 July, the UAH traded at 26.73 per USD, 1.6% weaker month-on-month. Nevertheless, since the beginning of the year the hryvnia has gained 5.1% on the USD and has been among the world’s best performing currencies this year. Our panelists see the hryvnia ending the year at 28.39 per USD and weakening to 29.75 UAH per USD at the end of 2019.