/ 9 July 2009

Economic confidence at nine-month low, GDP seen weak

South African economic confidence fell to a nine-month low in June due to expectations that the economy will shrink faster than previously expected and the central bank may have ended its interest rate cuts.

The Reuters Econometer published on Thursday fell to 242,69 in June from 251,97 in May. This measure of six weighted indicators on the economy’s medium term outlook was at its lowest reading since September 2008.

South Africa’s economy slid into its first recession in 17 years in the first quarter. June’s poll showed the economy was expected to contract more than previous forecasts this year.

The June consensus was that the economy would contract by 1,8% in 2009, then grow 2,12% in 2010. Both numbers were more bearish than expectations in May.

Finance Minister Pravin Gordhan said last week that while the economy could start recovering later this year, growth over the next few years would be about 2,5% to 3,5%, much less than the average 5% recorded between 2003 and 2007.

”Households are under pressure and consumption will fall by 2% to 3%. With the global economy in recession we are probably going to see exports remain under severe pressure,” said Absa Capital macro strategist Ian Marsberg.

Household expenditure fell 4,9% on an annualised basis in the first quarter, from a 2,7% contraction in the last quarter of 2008 — the third quarter of decline.

Exports fell 21% in the first quarter and are unlikely to recover as the global economy remains depressed.

On interest rates, June’s poll showed analysts had tempered their expectations of further interest rate cuts, which began in December. The central bank left the repo rate at 7,5% last month, following 450 basis points in reductions.

The poll put the repo rate at a mean of 7,2% by the end of 2009, and 7,6% by the end of next year. Both these forecasts were higher than those made in May.

”We are at a level where we think interest rates will remain for some time. Inflation remains very sticky; it’s still above target even though it’s slowed.” Absa Capital’s Marsberg said.

”If we look at the Reserve Bank’s monetary policy statement in June, there was a refocus back to inflation, whereas in previous statements they were looking more at growth.”

Inflation stubborn
CPI consumer inflation in the June poll was seen averaging 7,33% this year and slowing to 5,99% in 2010.

”The electricity price hike announced pushed forecasts up and food prices as well, and also transport prices on the back of the international oil price,” said Christelle Grobler, economist at the Bureau for Economic Research.

South Africa’s energy regulator granted state-owned power firm Eskom a 31,3% tariff rise from July 1, which critics said would add further pressure on consumers who are already battling high debt levels and inflation.

The central bank said international oil prices and rising administered prices were the main risks to the inflation outlook while the rand’s strength was a favourable factor.

The rand has gained about 13% against the dollar since the beginning of this year.

The poll forecast the rand at 8,53 by the end of this year and 8,70 by the end of 2010. – Reuters