The negative impact that a stronger rand will have on export performance as well as industries competing against imported products is expected to lead to a slower growth rate of 2,3% during the current year, according to ABSA economist John Loos.
In ABSA’s latest quarterly economic perspective, Loos says the slower growth will occur in spite of expectations of steadily declining inflation as well as interest rates.
“Off a high base, it is expected that domestic inflation will show an impressive decline, with the CPIX (consumer price inflation excluding the effect of interest rates on housing mortgage bonds) measure of inflation moving to a year-on-year rate below the 6% upper-target limit by the final quarter of the current year.
“This will be led by an even more impressive decline in producer price inflation, which from its December year-on-year rate of 12,4% is expected to reach single-digit figures as early as the January 2003 figure,” he states.
Key factors supporting lower inflation, he says, include the stronger rand since a year ago; the high base off which current inflation rates come; and the expectation of significantly lower global and domestic food price inflation as a result of the ultimate return to normality of weather conditions.
“A key risk to domestic inflation currently comes in the form of a possible oil price shock should a war break out in the Gulf, but it is believed that the US, mindful of its own weak economy, would go to great lengths to try and avoid such a shock.”
The expectation of lower inflation simultaneously leads to the expectation of lower interest rates but, given recent statements by the Governor of the Reserve Bank, Tito Mboweni, regarding the need to see a significant decline in inflation prior to interest rate reductions, it would seem that the Reserve Bank is set to take a cautious approach towards interest rate reductions, Loos adds.
It is therefore believed that the Bank would prefer to hold rates at current levels until June, at which stage the first 100 basis point reduction is expected. Thereafter, a further two 100 basis point cuts are anticipated during the remainder of 2003, Loos says.
Declining interest rates are expected to provide some stimulus for the economy, but not enough to offset the negative effect of the stronger rand on growth.
“Nevertheless, lower interest rates are expected to lead to stronger consumer demand in the area of durable goods, most notably motor vehicles, which are more interest rate sensitive than other consumer goods and services categories.”
According to Loos, real gross fixed capital formation growth is expected to remain at a similar rate to the estimate for 2002, that is above 6%, with government making an increasing contribution via its improvements in its capacity to spend on capital items. This increased contribution is expected to compensate for slightly slower average growth in private sector fixed capital formation during 2003.
“An improving rate of capital formation in recent years is believed to be creating a higher domestic output growth potential, and whereas average real annual GDP growth rates during the late-1990s were just above 2%, an average annual GDP growth rate of nearer to 3% may be realistic during the current decade,” he adds. – I-Net Bridge