Growth outlook revised higher amid better-than-expected out-turn
Stats SA released GDP figures for the first quarter of the year. GDP grew by 4.6% q/q at a seasonally adjusted and annualised rate (saar), following downwardly revised growth of 5.8% q/q (previously: 6.3% q/q). Importantly, the out-turn was higher than our 2.4% q/q estimate, and the Bloomberg consensus estimate of 3.1% q/q. Subsequently, we have lifted our annual GDP growth to 4.1% from our previous forecast of 3.7%, with forecasted risks still tilted to the upside. For instance, household credit extension could surprise to the upside, lifting household consumption expenditure by more than we currently project. On the downside, we are concerned about the intensified energy shortages, which dampens production and sentiment (and thus investment expenditure). We have also lifted our projections for the outer years to 2.2% in 2022 and 1.4% in 2023, from 1.7% and 1.3% previously. The recent announcement by the president to partially liberalise the energy sector by raising the limit on self-generation of power from 1 MW to 100 MW could help alleviate pressure on the grid and lift private sector investment in the outer years.
Adjustment to inflation and monetary policy outlook
We have adjusted inflation lower in 2021, from 4.1% to 4.0%, and two developments in the near term explain this. One is Discovery's announcement of a 5.9% average increase in medical aid premiums in July 2021. Stats SA's medical insurance surveys are conducted during February and April of each year, but an additional survey will be conducted this year to account for Discovery's late change - we are not aware of any other scheme that delayed premium increases. Since Stats SA surveys 10 medical aid schemes and premium changes are averaged on an unweighted basis, Discovery's change in July will account for a 10th and raise medical insurance inflation by 0.6ppt in July. This upward adjustment to medical insurance inflation raises annual core inflation marginally, but the impact on headline inflation is countered by stronger rand outcomes than our previous expectations. The second development is the stronger rand; the rand is roughly 70c stronger against the US dollar in our current forecast and its direct impact on headline results in inflation settling at a lower annual rate this year.
Globally, inflation fears have risen, stoking expectations that monetary authorities will start tightening policy sooner rather than later. Nevertheless, policy normalisation is expected to be gradual, and highly data dependent. As such, we have pencilled in two more 25bps hikes in our forecast horizon. That is, we now expect rates to increase by a cumulative 75bps in the forecast horizon: two 25bps hikes in 2022, and one in 2023. We still believe that monetary policy will be accommodative at these levels, commensurate with the fragile and protracted economic recovery.
House price growth revised higher
We have lifted our house price growth forecast across all segments to reflect better-than-expected actual house price performance outcomes and a slightly brighter GDP growth outlook. This adjustment incorporates stronger than previously assumed demand for mortgages across all segments. Pressure in the higher end is also ameliorated by a reduction in supply, due to owners withdrawing property for sale from the market and a slower rate of emigration. Price growth in the lower end continues to enjoy support from the persistent supply deficit.
Weekly highlight
Business confidence soared in 2Q21
After declining by five points in the first quarter, the RMB/BER Business Confidence Index (BCI) jumped by 15 points to 50 in 2Q21, clearing its pre-pandemic levels. Encouragingly, the improvement was broad-based, although uneven across sectors. For example, it rose sharply in the manufacturing, retail trade and motor trade sectors, but only marginally among building contractors and the wholesale trade sector. Looking ahead, however, uncertainties remain. Various risks such as the fast-spreading third wave of infections and the potential reimposition of stricter lockdown restrictions; the rolling blackouts as Eskom's electricity grid looks increasingly unstable; as well as the looming threat of industrial action could easily constrain confidence in the period ahead.
Mining output was up by 116.5% y/y in April, off the low base in April 2020
Unsurprisingly, total mining output (not seasonally adjusted) grew by 116.5% y/y in April, after increasing by 22.5% y/y in March. Non-gold mining production grew by 110.2% y/y in April, following 24.5% y/y growth in March. The lockdown-induced low base in 2Q20 means that we are still likely going to see double-digit year-on-year growth in May 2021.
Despite the solid annual growth rate in April, seasonally adjusted mining production, which aligns with the official calculation of quarterly real GDP growth, posted a mere 0.3% m/m. This is much lower than the monthly average growth of 3.2% between January 2021 and March 2021. The solid growth momentum in 1Q20 showed up in the sector's real GDP, which posted robust growth of 18.1% q/q annualised, contributing 1.2ppt to overall real GDP growth. Continued monthly growth momentum in mining production will be critical for the 2Q21 GDP outcome.
Our near-term outlook for the mining sector remains intact. We expect mining activity to be supported by the sustained higher commodity prices from last year and the anticipated robust economic growth rebound, mainly from South Africa's major trading partners. Export volumes contracted by 0.9% q/q in 1Q21, primarily due to reduced trade in mineral products and vehicles and other transport equipment. Still, we expect export volume growth to begin picking up from 2Q21, which should support the domestic mining sector. However, we are concerned about the continued load-shedding, which could curtail production and limit the extent to which export volumes benefit from the elevated terms of trade and rising external demand.
The current account surplus of R267.3 billion (5% of GDP) in 1Q21 reflected a significant nominal trade balance of R430.5 billion (8.1% of GDP), boosted mainly by higher nominal merchandise exports relative to merchandise imports. In other words, despite the quarterly decrease in export volumes of mineral products, vehicles and other equipment, the robust performance of nominal exports is supported by elevated terms of trade.
Manufacturing output up by 87.9% y/y in April
As expected, total manufacturing output (not seasonally adjusted) grew strongly by 87.9% y/y in April, following upwardly revised growth of 5.2% y/y (previously 4.6% y/y) in March.
Worryingly, seasonally adjusted manufacturing output, which is critical for the official calculation of quarterly real GDP growth, declined by 1.2% m/m in April after monthly average growth of 0.8% between January 2021 and March 2021. Although the monthly decline in seasonally adjusted production may not have been expected amid the manufacturing PMI that remained in expansionary territory, the decline of the business activity PMI (from 56.1 points in March to 50.8 points in April) had already signalled a significant slowdown in monthly production.
At this stage, the contraction in monthly manufacturing output and the slowdown in monthly growth momentum in mining production corroborate our view that quarterly real GDP growth likely moderated in 2Q20 following a better-than-expected out-turn for 1Q21.
Overall, our near-term outlook for the manufacturing sector remains positive. The sector's growth performance should continue rebounding from a lockdown-induced lower base in 2020, and performance should benefit from easier lockdown restrictions and improving local and external demand.
The recent manufacturing PMI survey outcomes point to better monthly performance in May and over the near term. In addition, the extent to which the sector's inventories fell last year means that the sector could ramp up production to meet rising local and external demand. We are, however, more concerned about the disruptive impact of continued load-shedding, which could curtail production.
Week ahead
Next week, Stats SA will release trade-related data, which will give us important clues about the strength of consumer demand. Following a surprise increase of 2.2% y/y in the previous month, retail sales volumes for March declined by 2.5% - significantly underperforming market expectations. In part, this decline reflected base effects from March 2020, due to "panic buying" by consumers as fears of a stringent lockdown loomed. We expect that the near-term retail sales trajectory will depict positive year-on-year growth, due to last year's stringent lockdown regulations. However, fundamentally, we are concerned about risks of the third wave of infections, which could disrupt economic activity and hamper the ongoing recovery in consumer spending.
