South Africa’s economic growth is likely to suffer as a result of global economic weakness, the strong rand and relatively high domestic interest rates, warns Absa economist John Loos.
Writing in the bank’s latest Economic Perspective, Loos forecasts a real GDP growth rate of 2% for the year, rising to 2,7% in 2004.
“At current levels, the rand is believed to be inappropriately strong when one considers South Africa’s structural constraints and limitations on its ability to compete internationally in what is a very subdued international economic environment,” he cautions.
“While a strong rand is ultimately positive for the economy due to the effect it has in forcing domestic business to become more efficient, a more stable rand at slightly weaker levels than are now prevailing would be more desirable in order to give domestic producers ample opportunity to phase in productivity improvements,” he adds.
Should the rand continue its spectacular performance, the implications for inflation are significant, Loos warns.
“Not only will imported inflation decline still further, but the impact of the strong currency on growth will simultaneously curb domestically-driven inflationary pressures,” he states.
According to Loos, some currency weakening is expected from current levels to around R8,50/$ by the end of the year.
“However, this is expected to be insufficient to curtail the steady downward trend in all key measures of inflation, with the result being a year-on-year CPIX inflation rate of 4% during the final quarter of 2003, and an average rate of 3% for 2004,” he says.
Loos states that the declining flexibility of both monetary and fiscal conditions in the major economies has been a concern over the past few months.
Inflation rates, he says, have been moving upwards while budget deficits have been expanding beyond tolerable limits.
“The fiscal and monetary stimulus applied to the major economies over the past two years also appear to be losing efficacy. Social conditions have been deteriorating, with rising unemployment levels, particularly in Europe,” he adds.
On the positive side, however, the conflict in Iraq did not have the effect that many had feared with regard to a spike in international oil prices.
“To the contrary, the speedy resolution of the conflict, and the prospect of the normalisation of Iraqi oil production, has seen oil prices falling quite dramatically, and the possibility exists that benchmark Brent crude may now test the $20/barrel mark in the foreseeable future.” – I-Net Bridge