Rates will rise, despite poor growth
South Africa’s GDP for the first quarter of this year declined by 0.6% on a quarterly basis (an increase of 1.6% year-on-year) and while a weaker growth rate was widely expected, this figure has disappointed most analysts’ forecasts.
Unsurprisingly, given the ongoing strike action in the platinum industry, mining and manufacturing were the main reasons for the contraction. Mining was worse than we expected, while manufacturing was slightly better, in line with the volatility we have seen in the PMI this year.
More promisingly, construction and internal trade – likely thanks to tourism – were both quite strong and mitigated the contraction in the mining and manufacturing space.
Looking ahead, a resolution in the platinum industry strike is imperative to any improvement in GDP growth for the rest of 2014. The weak growth performance was the primary reason why the SA Reserve Bank kept rates on hold in last week’s MPC meeting.
Unfortunately the cause of the weakness will also exacerbate the current account deficit. If global sentiment towards higher risk assets – such as emerging market currencies and bonds – eventually shifts, this would leave the rand exposed. Therefore, the path for interest rates remains up – despite the weakness in growth.
