Old Mutual sees Q2 economic growth rebounding

Old Mutual Investment Group (Omigsa) expects economic growth to have improved in the second quarter of 2017. However, it warns that South Africa is at risk of remaining trapped in a prolonged period of weak economic growth unless there is recovery in business, investor and consumer confidence.

High frequency data – including electricity generated as well as mining and manufacturing production – recorded over May and April tracks growth of around 2.5% on a seasonally adjusted annual rate. The economy entered technical recession, for the first time since the global financial crisis, after growth contracted by 0.7% in the first quarter of 2017 and by 0.3% in the last quarter of 2017.

The group has revised its economic growth forecast down to 0.8% after a series of “major shocks” including the cabinet reshuffle, credit ratings downgrades, revised Mining Charter and the Public Protector’s challenge to the central bank’s mandate.

“The economy is at risk of an extended period of sub-potential growth, with slow growth in recent years already to blame for rising macroeconomic vulnerabilities and ratings downgrades,” said Rian Le Roux, chief economic strategist at Omigsa.

Source: Omigsa

South Africa has, over the past year, benefited from a broadly supportive global environment on the back of the firmer commodity prices and low interest rates in developed markets, which drove investors chasing high yields into the local band market. However, this support is likely to fade as foreign central banks, primarily the US Federal Reserve, inch toward rolling back their stimulus programmes.

Le Roux said the country’s path toward fiscal consolidation would face a significant risk if the economy does not make a material recovery of the next few years. “Added to this, is the risk of losing our investment grade on local bonds, which could cause a sharp weakening of the rand and force interest rates higher”.

He said a local currency downgrade, which would impact investment in local bonds, could trigger a deterioration in the fiscal situation, further economic deterioration and policy uncertainty.

Le Roux said it was urgent to rebuild confidence in the economy to boost economic growth, job creation and investment.

Source: Omigsa

He said improvements in the current account deficit and lower inflation are promising and could also provide some respite for consumers. “An interest rate cut before year-end is also still possible, again provided that the rand doesn’t significantly slump by then”. Omigsa expects the rand to end the year at 13.25 to the US dollar.

He also pointed to the strong pushback against corruption, state capture and the undermining of institutions such as the central bank and media as “rays of hope”. As is a seemingly continued preference for pragmatic policies despite populist rhetoric and the fact that South African households are making progress with debt consolidation.

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