The SA Reserve Bank (SARB) is “likely” to cut the repo rate by 50 basis points at its monetary policy committee (MPC) meeting on July 22, Standard Chartered said on Friday.
This would take the repo rate to 6% from the current
6,5%.
“South Africa’s economic recovery has been weak so far, and highly dependent on the external environment,” economist Razia Khan said.
Although South Africa’s first quarter gross domestic product (GDP) growth of 4,6% seasonally adjusted and annualised surprised to the upside relative to the consensus, much of the strength came from mining and manufacturing, she said.
While gross domestic expenditure had accelerated in the first quarter, final consumption by households — although up — still lagged behind other indicators.
Real disposable incomes had improved more rapidly than initially expected as South Africa’s disinflation trend persisted, Khan said.
She said public sector wage awards had exceeded inflation, and this had also played a role.
“However, worryingly, outside of government, the economy shows little sign of meaningful job creation.
“The unemployment rate is 25,2% and may not have peaked yet.”
Khan said private sector credit growth remained weak, which was “somewhat curious” for an economy that survived the global financial crisis with its banking sector in good shape.
Khan said that although South African banks were apparently easing tight lending standards, appetite for new debt remained subdued.
“The uncertain environment may be to blame … consumer sentiment is still vulnerable.”
With the South African economy largely driven by the strength of external sectors, renewed nervousness about global prospects posed particular risks to the outlook.
“Already, the restocking momentum in manufacturing has started to wane and the SA PMI has fallen for four consecutive months.”
Although only five percent of the country’s exports were directed at Portugal, Ireland, Greece and Spain, one-third of the country’s exports went to the Euro area as a whole.
“South Africa has watched the growing global trend towards fiscal consolidation with some concern.
“To quote SARB governor Gill Marcus, some of the withdrawal of stimulus may have been premature.”
Khan said any deterioration in the euro area or global growth prospects would hit South Africa hard.
“Its domestic economy has not yet achieved the strength that would give it greater overall resilience.”
At the SARB’s latest MPC meeting in May, in the midst of the euro area sovereign crisis, the mood among MPC members was more cautious, with risks to the global economy emphasised, Khan said.
She added that if the economic outlook was uncertain and the medium-term inflation outlook was generally thought to be benign, then the SARB should cut interest rates at the July meeting.
“There is little point in waiting.” – Sapa