South Africa August 2018 Outlook



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.