Summary of macro-economic research views:
- Inflation: March inflation decelerated slightly to 5.3% y/y from the Feb reading of 5.6%. Softer food inflation was the culprit; however, this softer food inflation trend will likely reverse in the coming months to boost overall inflation. Only a stronger ZAR after a successful and constructive election will ensure that inflation continues to trend lower throughout the year.
- Repo rate: The SARB kept the repo rate unchanged at 8.25% for a fifth consecutive meeting in March. Its accompanying forward guidance was decidedly cautious, leading the market to push out expectations of eventual rate cuts in SA. Unfortunately, the market has turned very conservative and is positioned for an unchanged repo rate for the year.
- Government Finances: March closed off the fiscal year with a budget deficit of -R324.4bn (higher than last year’s -R310bn, but better than the -R347.4bn forecast in the Budget). This outcome equates to a budget deficit of roughly -4.6% of GDP, slightly improved on the -4.9% of GDP forecast in the Budget. Add to that the use of SA’s reserves to pay down debt and the authorities have bought SA more time to reform SA’s fiscal policy and render it more sustainable.
- GDP Growth: The South African economy avoided a technical recession at the back end of last year, with GDP growing 0.1% q/q in Q4. Through Q2, one factor that will assist in boosting GDP growth is the reduced incidence of load shedding, which should support the productive sectors of the economy. Add to that the slight improvement in SA’s terms of trade and the mining sector could also contribute a little more to GDP, helping offset the impact of SA’s agricultural challenges.
- Currency: Although the ZAR has staged an impressive recovery more recently, it remains vulnerable to a shift in sentiment. Much of the ZAR’s recent performance has been a function of offshore developments, including a weaker USD and a shift towards easier monetary policy expectations. That should stand SA in good stead, especially if the bond market can continue attracting foreign investors.
- Offshore conditions: US growth has proved to be more resilient than first anticipated, and the Fed is, therefore, cautious about easing monetary policy too quickly. That said, the Fed has indicated it will reduce the amount of quantitative tightening to reduce the pressure on the US bond market. That, coupled with a market that is more convinced there could be two rate cuts in 2024, should support offshore GDP expectations. However, China is still struggling to revive its business cycle convincingly and continues to rely on fiscal support from the government.