Data show signs of 'unexciting' recovery
"The growth figures underline the fragile nature of recovery. Further easing in monetary policy is still possible if growth disappoints again".
Growth and inflation figures released this week both disappointed gross domestic product for the third quarter came in at 2,6% and inflation at 3,4%. These key figures were previously 2,8% and 3,2% respectively.
“The latest GDP data, together with the low consumer inflation data, would certainly support the Reserve Bank’s decision last week to cut the Repo rate by 50 basis points”, said Kevin Lings, Stanlib chief economist.
The growth rate was well below market expectations for a rise of around 3,2%.
Lings said the lower growth was because of a decline in manufacturing output partially caused by strike activity and a disappointing performance out of the business and financial services sector.
Consumer activity slowed after a relative acceleration in consumer activity during the second quarter associated with the Fifa World Cup.
“There was also a further moderation in construction activity, which was largely anticipated given the fall-off in infrastructure related activity after the World Cup.”
Lings noted that the agricultural and mining sectors recorded improved performance, with the mining sector recovering nicely after labour disruptions earlier this year.
The higher than expected inflation outcome was because of an unexpected increase in new vehicle prices and an increase in petrol prices, said Investec economist Kgotso Radira.
“Excluding administered prices [those that are controlled by government], inflation would be 2,7%, but higher administered prices are the main driver of the structural inflation rate.”
“The GDP outcome is in line with the expectation of moderate growth in coming quarters,” Radira said.
“Growth on the demand side will depend on the pace of employment creation, which will be sluggish well into 2011.”
The Nedbank Economic Unit agreed that the disappointing growth figure was roughly in line with the monetary policy committee’s (MPC) predictions and therefore has “little immediate implications” for monetary policy.
“However, the [growth figures] do underline the fragile nature of the recovery. Further easing in monetary policy is still possible if growth disappoints again and the rand remains strong,” the unit said in a press statement.
Lings said that although the GDP performance was somewhat disappointing, “it still suggests that South Africa has convincingly exited the recession and is experiencing a reasonably solid, albeit unexciting, economic recovery”.
The Nedbank Economic Unit said that “growth will probably improve slightly in the final quarter as manufacturing bounces back from strike disruptions.
“However, for the year as a whole we are still forecasting 2,8% and 3% in 2011.”
Although the inflation outcome was marginally higher than expected, Radira said, it does not materially change Investec’s view on the inflation outlook, which expects an average of 4% next year.
“We believe there is room for another interest rate cut in the first quarter of 2011, but this will depend on the data between now and the next MPC meeting.”