Consensus Report: Manufacturing Data, Economic Growth and Inflation - August 21

  • Market Overview

Outlook improves

  • Incoming data for Q2 is mixed. Manufacturing production declined in monthly terms in April–May, while retail sales rebounded in the same period compared to Q1. Meanwhile, the private sector PMI averaged higher in Q2, although it dropped to a three-month low in June, suggesting that activity lost momentum at the tail end of the quarter. Furthermore, new Covid-19 cases have soared since end-May, forcing authorities to extend restrictions on public gatherings, alcohol sales and nighttime movement until at least 25 July. In other news, violent protests broke out across the country in mid-July, with the incarceration of former President Jacob Zuma earlier in the month providing the catalyst for an eruption of discontent over persisting inequality and poverty. More than 200 people have been killed, while the unrest has disrupted economic activity and the already-delayed vaccine rollout.

Economic Growth and Change in GDP forecasts chart

  • Economic activity is set to recover in 2021 amid a revival in domestic and external demand as the effects of the pandemic fade. That said, weak public finances, electricity outages and an elevated unemployment rate represent key risks. Uncertainty over the course of the pandemic, social unrest and a slow vaccine rollout further cloud the outlook. FocusEconomics panelists see the economy expanding 4.3% in 2021, which is up 0.4 percentage points from last month’s forecast, and 2.5% in 2022.

  • Inflation climbed to an over two-year high of 5.2% in May from April’s 4.4%, on the back of higher transport costs. It thus moved above the midpoint of the Central Bank’s 3.0%–6.0% target range. Looking ahead, while inflation should drop from its current levels later in the year, higher electricity prices could exert upward pressure. Our panel sees inflation averaging 4.3% in 2021, which is up 0.2 percentage points from last month’s forecast, and 4.4% in 2022.

Inflation and Change in inflation forecasts chart

  • At its latest meeting on 20 May, the South African Reserve Bank (SARB) left the repo rate on hold at 3.50% despite intensifying price pressures, while hinting at rate hikes later this year. The next monetary policy meeting is scheduled for 22 July. The majority of our panelists see the Bank on hold through year-end, with only some expecting tightening sometime later in H2. FocusEconomics panelists see the SARB repo rate ending 2021 at 3.57% and 2022 at 4.30%.
  • The rand came under further pressure against the USD in recent weeks as violent riots, coupled with Covid-19 concerns, weighed on investor sentiment. On 16 July, the ZAR traded at 14.42 per USD, marking a 4.6% month-on-month depreciation. While the currency is projected to regain some ground by year-end, a weak economic backdrop and frail fiscal metrics are key risks. Our panel sees the ZAR ending 2021 at 14.34 per USD and 2022 at 15.18 per USD.

REAL SECTOR | Manufacturing production growth moderates in May

Manufacturing production rose 35.3% year-on-year in May (April: +88.1% yoy), partly reflecting a low base effect. Looking at the details of the release, food and beverages production growth softened in May, and petroleum, chemical products, rubber and plastic products output growth also lost steam. Moreover, the trend improved, with the annual average growth of manufacturing production coming in at plus 6.7%, up from April’s 1.1%.

On a seasonally-adjusted monthly basis, manufacturing production fell at a quicker rate of 2.6% in May (April: -1.2% mom), the worst result since April 2020.

FocusEconomics Consensus Forecast panelists project manufacturing output to expand 8.1% in 2021, which is up 1.0 percentage point from last month’s forecast. For 2022, the panel sees manufacturing output expanding 2.0%.

Our panelists see the economy expanding 4.3% in 2021, which is up 0.4 percentage points from last month’s estimate. In 2022, the panel projects GDP to grow 2.5%.

REAL SECTOR | PMI drops to three-month low in June, hinting at slowdown in private sector activity

The South Africa IHS Markit Purchasing Managers’ Index (PMI) came in at 51.0 in June, down from May’s 53.2 and marking the lowest reading in three months. Although the index remained above the 50-threshold, signaling an improvement in business conditions from the previous month, it suggests a loss of momentum in private sector activity at the tail end of Q2.

June’s reading largely came on the back of the first contraction in output in six months as the tightening of coronavirus restrictions held back demand. Moreover, new orders growth was halted in June and export orders fell for the first time in three months. That said, firms raised staff levels at the fastest pace since November 2012 amid a sharp increase in backlogs of work. On the price front, input cost inflation continued its upward trend due to supply issues and higher salary costs. Output charges also rose, but at the slowest rate in three months. Lastly, sentiment among firms weakened for the second consecutive month amid increased concerns that reimposed Covid-19 containment measures would hamper activity.

FocusEconomics Consensus Forecast panelists see fixed investment growing 2.3% in 2021, which is down 0.4 percentage points from last month’s estimate. For 2022, the panel projects fixed investment expanding 4.5%.

Manufacturing Production Chart

MONETARY SECTOR | Inflation hits over two-year high in May

Consumer prices rose 0.08% over the previous month in May, coming in below April’s 0.67% increase. May’s result marked the softest rise in prices since November 2020. The result was chiefly driven by moderating price pressures for food and non-alcoholic beverages and falling prices for transportation.

Inflation | Consumer Price Index

Inflation came in at 5.2% in May, up from April’s 4.4%. May’s figure represented the highest inflation rate since November 2018. Annual average inflation edged up to 3.3% in May (April: 3.1%). Core inflation ticked up to 3.1% in May, from April’s 3.0%.

Commenting on the outlook for inflation, Pieter du Preez, senior economist at Oxford Economics, reflected:

“We expect inflationary pressures to moderate towards the end of the year. The stronger rand, compared to last year, and lower food prices will aid in driving inflation lower over the short term. However, some upward pressure will stem from a 15.6% rise in electricity prices.”

FocusEconomics panelists see inflation averaging 4.3% in 2021, which is up 0.2 percentage points from last month’s forecast, and 4.4% in 2022.

Purchasing Managers' Index chart

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