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An­nual growth in man­u­fac­tur­ing pro­duc­tion has de­cel­er­ated steadily from 4.6% y/y in 2010 to 1.3% y/y in 2013

THE big news in March will be the re­lease of SA’s of­fi­cial GDP fig­ure for 2015, as well as an­nual sta­tis­ti­cal re­vi­sions to pre­vi­ous GDP fig­ures go­ing back sev­eral years.

The SA econ­omy nar­rowly avoided en­ter­ing a re­ces­sion in the third quar­ter of 2015, re­cov­er­ing to post pos­i­tive quar­ter-on-quar­ter growth of 0.7% af­ter a con­trac­tion of 1.3% in the se­cond quar­ter.

How­ever, on a year-on-year ba­sis, SA achieved real GDP growth of just 1% in the third quar­ter — its slow­est rate since the re­ces­sion of 2009.

The Reuters con­sen­sus ex­pec­ta­tion is that fourth-quar­ter growth will also av­er­age about 1%, bring­ing the growth fig­ure for the year as a whole to just 1.3%.

The data will be re­leased by Stats SA on March 1.

The global econ­omy also ex­pe­ri­enced weak growth in 2015, with the slow­down par­tic­u­larly marked across emerg­ing mar­kets, which have borne the brunt of the col­lapse in com­mod­ity prices, ex­plains In­vestec chief econ­o­mist Annabel Bishop. “SA has been heav­ily in­flu­enced by th­ese con­di­tions, with in­dus­trial pro­duc­tion fall­ing.”

At the same time, SA’s agri­cul­ture sec­tor has been af­flicted by the worst drought in decades, while con­sumer de­mand has be­gun to slow due to fall­ing con­fi­dence amid higher taxes and in­ter­est rates. Th­ese con­di­tions are likely to per­sist in 2016, she warns.

The con­sen­sus is that the SA econ­omy will grow by just 0.9% this year, ris­ing to 1.7% in 2017.

Lo­cal man­u­fac­tur­ing and min­ing data re­leased last month con­firm the econ­omy is stag­nant but not col­laps­ing, though the risks re­main to the down­side.

BNP Paribas Se­cu­ri­ties econ­o­mist Jef­frey Schultz notes that the man­u­fac­tur­ing sec­tor’s un­der­ly­ing growth mo­men­tum re­mains poor and likely acted as a drag on growth in the fi­nal quar­ter of last year.

“This does not bode par­tic­u­larly well for fourthquar­ter pro­duc­tion-side GDP growth fig­ures due on March 1, given that the man­u­fac­tur­ing in­dus­try con­trib­utes more than 13% to the coun­try’s gross value added,” he says.

An­nual growth in man­u­fac­tur­ing pro­duc­tion has de­cel­er­ated steadily from 4.6% y/y in 2010 to 1.3% y/y in 2013. For the past two years, the sec­tor has been un­able to grow at all, post­ing year-on-year growth of 0.1% in 2014 and 0% last year.

Un­for­tu­nately, the prospects for 2016 do not look any bet­ter. SA’s man­u­fac­tur­ing PMI slipped back to the global fi­nan­cial cri­sis level of 43.5 in­dex points in Jan­uary. The in­dex has been below the 50 neu­tral mark for six con­sec­u­tive months.

“Fal­ter­ing global and do­mes­tic de­mand, weaker com­mod­ity prices and man­u­fac­tur­ing busi­ness con­fi­dence which re­mains at cri­sis lows are all un­likely to see a turn­around in SA’s sup­ply-side growth for­tunes any­time soon, in spite of the weaker rand help­ing to cush­ion some of the blow to larger, more ex­port-ori­ented man­u­fac­tur­ers,” says Schultz.

Though there was a marginal in­crease in the Re­serve Bank’s lead­ing busi­ness cy­cle in­di­ca­tor in Novem­ber, the trend re­mains neg­a­tive, con­sis­tent with the sub­dued out­look.

In ad­di­tion, the Rand Mer­chant Bank/Bureau for Eco­nomic Re­search busi­ness con­fi­dence in­dex de­clined in the fourth quar­ter of 2015 to its low­est level in five years.

The con­tin­u­ing drought also means that the agri­cul­tural sec­tor is likely to con­tract.

Un­der­ly­ing the bleak growth

out­look is con­tin­ued low growth in gross fixed cap­i­tal for­ma­tion, with pri­vate sec­tor in­vest­ment con­tract­ing in the third quar­ter. The prospects for for­mal sec­tor em­ploy­ment growth there­fore re­main bleak.

The con­sump­tion side of the econ­omy is not ex­pected to fare much bet­ter.

The col­lapse in con­sumer con­fi­dence bodes ill for GDP growth this year, due to its strong cor­re­la­tion with house­hold con­sump­tion ex­pen­di­ture. The lat­ter con­trib­utes roughly 61% to GDP growth.

“The lat­est read­ing of con­sumer con­fi­dence shows a very de­pressed eco­nomic out­look in­dex read­ing, as house­holds’ sen­ti­ment about the fu­ture of the econ­omy de­te­ri­o­rated dra­mat­i­cally,” notes Bishop. “Higher taxes and in­ter­est rates will ex­ac­er­bate this de­pressed out­look, weak­en­ing eco­nomic growth as con­sumers con­strain spend­ing growth.”

She es­ti­mates that the odds of a re­ces­sion de­vel­op­ing this year are about 40%.

The risks of the drought, to­gether with an ex­tremely hawk­ish mon­e­tary pol­icy stance and the fis­cal ne­ces­sity to ex­tract higher taxes, will cause house­holds, and there­fore the econ­omy, to bat­tle.

“In­deed, with­out a turn­around in the cur­rent en­vi­ron­ment that SA busi­nesses face, par­tic­u­larly an im­prove­ment in the ease of do­ing busi­ness, it is dif­fi­cult to see how eco­nomic growth will avoid shift­ing down to­wards 0% this year, and so ul­ti­mately risk­ing re­ces­sion,” says Bishop.

Just how hawk­ish the mon­e­tary pol­icy stance will be will be­come clearer on March 17 when the Re­serve Bank’s mon­e­tary pol­icy com­mit­tee (MPC) holds its se­cond meet­ing of the year.

Fol­low­ing the steep de­te­ri­o­ra­tion of the Bank’s in­fla­tion fore­cast and the MPC’s 50 ba­sis points (bp) repo rate hike in Jan­uary, the big ques­tion is whether the Bank will con­tinue to hike in such large in­cre­ments.

Ned­bank’s eco­nomic unit ex­pects a 25 bp hike at ev­ery MPC meet­ing un­til mid-2016 in or­der to tackle ris­ing prices in the econ­omy. “This will neg­a­tively im­pact growth fur­ther as de­mand is squeezed and busi­nesses find it in­creas­ingly dif­fi­cult to op­er­ate in a stagflationary en­vi­ron­ment,” it warns.

As ever, the MPC will be watch­ing in­ter­na­tional de­vel­op­ments closely. By the time it meets, it will have had the ben­e­fit of the out­come of the Euro­pean Cen­tral Bank’s (ECB) meet­ing on March 10, as well as the US Fed­eral Open Mar­ket Com­mit­tee (FOMC) meet­ing on March 15-16.

RMB cur­rency strate­gist John Cairns ex­pects the ECB to ease pol­icy fur­ther, through a rate cut or more quan­ti­ta­tive eas­ing.

The Fed is widely ex­pected to hold off any fur­ther hikes for much of the first half of the year, given ev­i­dence that the US econ­omy may be slow­ing.

Speak­ing be­fore the US Congress last month, Fed chair Janet Yellen re­mained op­ti­mistic about the state of the US econ­omy, say­ing the FOMC’s base case was still for mod­er­ate rate hikes.

How­ever, she con­ceded that in­ter­na­tional de­vel­op­ments, es­pe­cially China’s slow­down, pose an in­creas­ing down­side risk to the US econ­omy. This would af­fect the Fed’s abil­ity to raise rates in a mean­ing­ful way.

“De­spite not clos­ing the door on a March hike, mar­kets will be even more con­vinced that the cur­rent hik­ing cy­cle may al­most be over,” says RMB’s Deon Kohlmeyer.

Ac­cord­ing to RMB, Fed fu­tures dropped marginally af­ter the speech and now price in just a 20% prob­a­bil­ity of a hike this year. Greater clar­ity will be pro­vided at the Fed’s March meet­ing, where Fed mem­bers will in­di­vid­u­ally spec­ify what they ex­pect the fu­ture path of the Fed rate to be (the so-called “dot plot fore­cast”).

Ned­bank an­tic­i­pates a ma­te­rial flat­ten­ing of the Fed’s dot plot fore­cast over the next two years in re­sponse to slower global growth and a more un­cer­tain out­look.

A less ag­gres­sive US hik­ing path should be good for the rand and the SA econ­omy, eas­ing pres­sure on the MPC to raise rates as ag­gres­sively to main­tain the yield at­trac­tion of the rand.

How­ever, in so far as a muted Fed is in­dica­tive of slow­ing global growth, weak global de­mand and flat com­mod­ity prices, the SA econ­omy can be ex­pected to con­tinue to strug­gle.

Ned­bank’s eco­nomic unit ex­pects a 25 bp hike at ev­ery MPC meet­ing un­til mid-2016 to tackle ris­ing prices in the econ­omy

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