• Over half of the world’s economies are experiencing faster economic growth on the back of an improvement in trade and investment (as per World Bank data), while unemployment in key developed economies (US, Japan, Europe) is declining. Developed economies’ monetary policy is generally accommodatory, and is not expected to be tightened, but return to neutral levels instead as inflation pressures are expected to emerge. 
• However, global market risk-off has escalated as the transition to neutral US interest rates has become more advanced. A number of EM interest rate hikes are now occurring, essentially to increase the attractiveness of interest rate differentials between emerging markets and developed economies. South Africa is certainly unlikely to see any further interest rate cuts in the current risk-off period.
• South Africa saw three quarters of growth averaging 2.8% y/y last year, up from 0.6% y/y the year before, on the recovery from severe drought and the rise in global growth, and so in the commodity cycle. While Q1.18 saw GDP fall by 2.2% qqsaa, such a weak GDP outcome is not generally expected to be sustained into Q2.18 (i.e. a recession materialize) as Q1.18’s contraction was largely due to base effects following strong growth at the end of 2017.
• South Africa has seen its competitiveness and institutional strengths deteriorate substantially in the past few years, as has its credit ratings, to an average of sub-investment grade from the three key credit rating agencies. The governance of the SOEs and state institutions also deteriorated substantially in the past several years, as did the health of government finances, depressing business confidence over the entire period. Real household income growth and the efficacy of corporate boards also deteriorated and corruption proliferated. 
• The IMF warns that economic growth in SA will not lift beyond 2% in the absence of resolving uncertainties surrounding land expropriation without compensation and outstanding structural reforms.

• The rand recently weakened materially in Q2.18 on the surge in global risk-off (including this year’s market recalibration to expected higher US interest rates), as foreigners sold a substantial amount of SA’s portfolio assets. Emerging markets in general experienced marked portfolio outflows, causing their currencies to weaken, but for the rand this weakness was particularly marked, following substantial portfolio inflows in Q1.18, which were then more than reversed. The domestic currency will remain vulnerable to global investor sentiment for the rest of the period.
• South Africa got off to a weak start in 2018, as GDP growth contracted by -2.2% qqsaa in Q1.18, (quarter on quarter, seasonally adjusted, annualised) leading to concerns of a recession. While a recession is not expected, Q2.18 has also got off to a weak start, with industrial production contracting by close to -11%qqsaa for the three months to May. 
  Additionally, in Q2.18 business confidence fell towards 2017’s average of 35 (2017 was the worst year since 2009), which is reflective of the impact that the weakening of SA’s fundamentals from 2009 to end 2017 has had, and still has. The damage to business confidence has not yet been repaired, while recent sharply higher petrol prices, rand weakness, broad scale substantial consumer tax increases. Lower confidence indicates a likely lower GDP growth outcome for 2018. 
• We have lowered our GDP growth forecast for 2018, to 1.4% y/y, from 1.8% y/y. Higher business confidence (which instead fell in Q2.18) would kick-start faster economic growth, with both greater foreign direct, and domestic fixed, investment into SA. We expect no credit rating downgrades this year, although if GDP growth continues to disappoint then this will become a risk. Interest rate cuts are unlikely. Post the 2019 national election growth is expected to accelerate on greater political certainty.
  
  

Unless otherwise stated all views in this document are of the baseline (expected) case – all forecasts are subject to changes – please see disclaimer.