South Africa: Fall in Manufacturing Output but Stronger Retail Sales Highlights Economic Dichotomy Ahead of Today's Mpc Decision; We See Rates On Hold Despite Lower Zar

Summary

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With the SARB's monetary policy committee two-day meeting due to pronounce its decision on interest rates today, the latest economic data quite neatly encapsulates the dilemma facing the monetary authorities at present. The April manufacturing output data showed an unexpected 2.0% fall on the month, partly distorted by the large number of public holidays, and now stands just 0.1% higher than a year earlier, re-awakening concerns about the impact of the earlier strength of the ZAR. Although there should be some recovery in May and June, with the strongly rising PMI pointing in this direction, it remains the case that the supply side of the economy remains fairly lacklustre. In contrast to the output data, however, retail sales data for March remained very strong, posting yet another double-digit increase from a year earlier and showing no signs of moderating from the pace seen over the past two years. This will reinforce concerns about the high rate of credit growth and the rise in household debt. Adding to the uncertainty about rates is the recent fall in the ZAR, which SARB governor Mboweni has said will add to inflationary pressures. On the other hand, the lower ZAR will bring some relief to local manufacturing, a view that Mboweni cannot publicly express for fear of possibly triggering a run on the currency. On balance, we still expect rates to be left on hold today, and perhaps for a while yet, although the risks of a rate rise do appear to be mounting.

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South Africa: Fall in Manufacturing Output but Stronger Retail Sales Highlights Economic Dichotomy Ahead of Today's Mpc Decision; We See Rates On Hold Despite Lower Zar

Manufacturing output falls sharply in April...

Despite the recovery in the purchasing managers' index (PMI) to further above the 50 level in April, manufacturing output in the same month fell back sharply, underlining earlier concerns about the impact of ZAR strength on local manufacturing. Data released by Statistics South Africa (SSA) on 7 June showed that seasonally adjusted output fell 2.0% in April, exactly reversing the upwardly revised March increase. SSA attributed ...

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