Source: Stats SA, Absa WIMI (March 2019)
The biggest contributor to the positive outcome was finance, real estate, and business services which increased by 1.8% for the year. It is worth noting that the top three contributors for the second half of 2018 were service-related sectors, showing the growing importance of the tertiary sector to SA as a whole. On the other end of the spectrum, the worst performer was Agriculture, mining, and construction which contracted by 4.8%. Most of the underperformance for the sector was in the first half of 2018.
Market reaction was noticeable and positive. The rand was trading at R14.22/USD at the start of the day and strengthened to R14.14/USD after the GDP print. The benchmark bond, the R186 strengthened from a market open of about 8.74% to 8.68%. It is worth stating that the rand had a strong start to the year but swung from being one of the best-performing currencies in the Emerging Markets (EM) basket in January to one of the worst, next to the Brazilian real, for the month of February. The currency went from its strongest level of around R13.24/USD end of January to current levels, which remains sticky above R14. One cannot ignore the impact Eskom has had on multiple sectors. The power utility resumed load shedding in November 2018 and compounded with strike action and mine shutdowns, the impact could be seen specifically in the mining production numbers for November and December 2018.
The United States (US) and China trade talks will remain imperative to risk sentiment which will impact EM macro-economic fundamentals and currencies. The Chinese policymakers have reduced growth estimates to 6%-6.5% for 2019. While this is the lowest we’ve seen in over a decade, this is still not a hard landing and there is some comfort in knowing that they anticipate the potential slowdown and that they are building in support measures to ensure that the economy continues to grow at a reasonable pace.
Market focus is now on the macro-economic data for Q1, such as vehicle sales, out last week, which was down 6.5% (YoY) for February, after the -7.5% YoY in January. The SACCI Business Confidence index also fell in January, which was likely on the back of renewed concerns around load shedding, weak domestic fundamentals, and looming general elections. The Absa Manufacturing PMI showed a drastic deterioration in business activity, falling sharply from 49.9 in January to 46.2 in February. Both prints were below the 50 mark, which indicates contractionary territory for Q1, with only one more month to go for the quarter. Looking forward, the Expected business conditions index which measures, which is more forward-looking than the Purchasing Managers Index (PMI) and shows manufacturer’s expectations in six months’ time shows that expectations are upbeat, which is in line with post elections timelines.