South African Rand Drops on Crash in GDP and Falling Global Stock Markets

- SA records a year of negative economic growth
- Economy shrinks 51% in 2nd quarter
- Falling stocks heap pain on ZAR

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• GBP/ZAR spot rate at time of publication: 22.12
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• Specialist transfer rates (indicative guide): 21.93
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The South African Rand was left reeling by news the economy shrank by more than markets were expecting, while a rout of global stock and commodity markets gave investors further reason to sell.

Statistics South Africa reported annualised GDP shrank 51.0% quarter on quarter in the second quarter as the country was put into a lockdown to restrict the spread of covid-19. This is greater than the -47.3% markets were expecting and hence delivers a negative surprise for the Rand.

Year-on-year growth read at -17.1% in the second quarter, which is greater than the -16.5% markets were looking for.

The GDP announcement came on a day that saw global stock markets and commodities come under fresh pressure, creating a global backdrop that typically lends itself to Rand weakness.

"After starting the day already slightly weaker, the rand came under further pressure this afternoon following the announcement that GDP had plummeted by 51% quarter-on-quarter annualised during Q2 2020, mostly due to the lockdown and the implications that this had on economic activity," says Bianca Botes, Executive Director at Peregrine Treasury Solutions.

The Pound-to-Rand exchange rate rose 0.40% to reach 22.08 while the Euro-to-Rand exchange rate rose 1.30% to reach 19.99 and the U.S. Dollar-to-Rand exchange rate rose 1.60% to trade at 16.96.

"It is important, however, to note that South Africa has already been in a recession after facing three consecutive quarters of economic contraction. This now implies that we have seen a full year of economic decline," says Botes.

Botes says the extent to which this economic contraction will impact on both fiscal and monetary policy and how we will be able to navigate the road ahead will be crucial, given the current dire fiscal position that government faces.

According to StatsSA, the largest negative contributors to growth in GDP in the second quarter were the manufacturing, trade and transport industries. The manufacturing industry decreased by 74.9% and contributed -10,8 percentage points to GDP growth.

"Government imposed lockdown restrictions have wreaked havoc on economies around the world and served to exacerbate the numerous challenges South Africa was already facing before the onset of the pandemic, including elevated unemployment and a highly constrained fiscus," says Lara Hodes, an economist at Investec.

Survey data covering the third quarter meanwhile shows that a recovery is underway as lockdown restrictions are eased. Manufacturing production is leading the recovery, with survey data showing the country's largest economic sub-sector expanded by a substantial 16.8% month on month in June, while electricity production rose 8.3% m/m in June and 10.2% m/m in May.

Elsewhere, a back up of orders and work in the construction sector saw activity shoot up, with buildings completed rising 206.4% m/m in May in 515.7% in June.

"However the path to pre-covid levels is likely to be protracted and arduous. Electricity supply challenges, persistent policy uncertainty and the slow implementation of crucial reforms continue to weigh on business and consumer confidence, inhibiting growth. We are still anticipating a -10.1% y/y contraction in GDP for this year," says Hodes.

Concerning the outlook for the Rand in light of the disappointing GDP data, we reported yesterday that Investec's Chief Economist Annabel Bishop sees further potential for modest gains in the currency towards year-end, provided the domestic economic recovery can extend and global markets continue to recover.

Unfortunately for those looking for a stronger Rand, global markets are under pressure in early September, with a sell-off in the U.S. tech sector spilling over into a second week and triggering losses in other sectors and asset classes.

"Sentiment towards risk assets have turned somewhat bearish in recent days. As well as selling of US technology shares, oil prices, the pound and crytpos have also come under pressure. This morning saw European indices gave back some of the gains made yesterday in the absence of US markets. US index futures have declined ahead of the open following the long break, with tech stocks seen tumbling at the open. The risk-off tone has helped to push the dollar higher across the board, which has even weighed on gold," says Fawad Razaqzada, a Market Analyst at Thinkmarkets.com.

How long the sell-off lasts will be key to how soon the Rand can continue its short-term trend of appreciation.

Duncan Toms, Fixed Income & Multi-Asset Strategist at HSBC in London says his team is not concerned about this wobble.

"First, in the context of rally over the last two months, this simply resembles a blip. Second, put/call ratios in US equities have already jumped substantially, so we view this as a healthy correction," says Toms.