Surprisingly poor GDP growth should not derail tighter monetary policy

Carmen Nel, Economist and Macro Strategist,
Matrix Fund Managers

GDP growth disappointed in the third quarter of 2021, with the -1.5 % quarter-on-quarter seasonally adjusted print, at the low side of the -1.6% to -0.6% consensus forecast range. That said, much of the drag came from a 13.6% q/q slump in the volatile agriculture component, which was in contrast to high-frequency agriculture data and confidence surveys that point to relatively robust growth in the sector. If we exclude agriculture, GDP contracted by 1.1% during the third quarter.

While the headline number was a negative surprise, the markets did not react strongly to the release, with the both the rand and bonds trading stronger into early afternoon trade. The underlying detail was also not quite as alarming at the headline number. Relative to our expectations, growth in utilities, construction, financial, real estate and business services, and personal services positively surprised, while the negative surprises were contained to agriculture, manufacturing, and trade. On the demand side, the drag on growth came mainly from household consumption expenditure and exports.

Expect forecast downgrades

The best of the base effects is clearly in the base, but leading indicators, such as the PMI, point to a rebound in Q4 activity. We expect a c. 1.2% – 1.5% rebound in GDP in Q4, but pending restrictions due to the Omicron variant pose downside risk to this estimate. The Q3 data and elevated uncertainty should prompt analysts to downgrade their GDP expectations for 2021 from c. 5.0% towards 4.5%.

The third quarter was marred by the Delta variant, the attendant alert level 4 lockdown restrictions, a sharp slowdown in global growth, notably in China, as well as the domestic social unrest. These were reflected across household consumption, where all the subcomponents contracted except for spending on healthcare, while private sector fixed investment also fell. The macro backdrop remains challenging given the Fed’s taper and renewed travel restrictions on South Africa.

MPC likely to continue hiking rates

Notwithstanding the negative surprise in the GDP release, we do not think it is sufficient to deter the SARB from hiking the repo rate further. The MPC is likely to focus increasingly on upside inflation risks, particularly related to vulnerabilities to the exchange rate. Hence, further repo rate hikes in the short to medium term should not be ruled out, even if these are unlikely to be as aggressive as the interest rate market is currently pricing in.