- Q1 GDP figures published today by the South African Statistical Office surprised well on the downside surpassing our and consensus expectations.
- Today’s release confirms that the South African economy is in a recession.
Details
The South African economy slowed significantly in Q1 contracting by 6.4% q/q (seasonally adjusted, annualised – s.a.a) down from a 1.8% q/q fall registered in Q4 last year. This was significantly weaker than our forecast of -3.0% q/q s.a.a. and the consensus expectation of - 3.5% q/q. The main culprits were manufacturing and mining, which shrunk by 22.1% and 32.8% respectively – the biggest declines on record. The worse-than-expected number was negative for the rand, which has weakened by over 1.8% since the release.
Assessment & Outlook:
Today’s number shows that the South African economy is in a deep recession and the South African central bank faces a policy dilemma whether to continue its big-size rate cuts or to respect the still stubbornly high inflation with less favourable inflation outlook and decide in favour of moderate monetary easing going forward.
Taking into account that inflation remains sticky and well above the inflation target range of 3%-6% (we expect inflation in April to be above 8%) and the outlook of inflation declining less than previously expected, we stick to our rather conservative expectation of an only 50bp rate cut at this week’s MPC meeting, which would bring the key policy rate to 8.00%. However, in light of today’s bad Q1 GDP outcome a 75bp rate cannot be ruled out.
