South Africa’s Bureau for Economic Research (BER) has revised downward its forecast for real economic growth for the country in 2003 to 2,2% y/y from 2,6% previously, due to the stronger-than-expected slowdown experienced over the first half of the year.
In its latest economic forecast for South Africa, released on Wednesday, the BER said, however, that the demand side of the economy remained resilient and the expected macroeconomic environment was favourable, which should benefit domestic production conditions over the short-term. The economy was expected to re-accelerate towards the end of the year, with real GDP growth projected at 3,5% y/y in 2004.
CPIX inflation was forecast to decelerate to average 5,4% in 2004, within the official target range of 4-6%, the BER added, and the organisation expected another 300 basis points of cuts in interest rates between August 2003 and February next year. Under these conditions, and should the world economy continue to recover, the current economic slowdown was unlikely to evolve into a recession, it said.
The BER said the domestic real economic situation deteriorated significantly over the past three quarters, as particularly the production side of the economy came under pressure from the weak world economic conditions, the strengthening rand exchange rate and the higher level of interest rates. The economic slowdown had been stronger than expected.
In the main, the tradable goods producing sectors, such as mining and manufacturing, were under pressure from the strong rand and the weak world economy, however, apart from these sectors the economy was far from a recession, the group noted. There appeared to be resilience in domestic demand conditions, as the growth in real household consumption expenditure was measured at 2,5% (quarterly annualised) during the first quarter of 2003 and real gross domestic fixed investment at 8,5%.
Whilst mining and manufacturing fixed investment was expected to slow down, real domestic expenditure should receive a boost from lower interest rates and inflation going forward apart from the substantial tax cuts already in the system. Consumer confidence was trending upwards.
“Prospects for real domestic expenditure therefore remain favourable given the expected macro environment and the production side of the economy should benefit,” the BER said.
“To the extent that the world economic recovery remains sluggish and the rand strength persists, the recovery in the mining and manufacturing sectors will be dampened.
“We do not expect a strong recovery during the third quarter, however, towards the end of the year the broader economic conditions should improve bar unforeseen developments on the external front. The BER emphasises that whilst the real economic performance is likely to be weaker this year compared to 2002, they do not anticipate a recession. World economic conditions are also expected to improve, albeit likely that this will be a modest affair.
The BER decided to scale down their growth forecast for 2003, given the stronger than expected slowdown during the first half of the year. Real GDP growth was forecast to decelerate to 2,2% in 2003 (from 3% in 2002) and then to accelerate to 3,5% in 2004. The BER pointed out that whilst growth for 2003 was weaker than previously projected (2,6%), they did not find reason at this stage to scale down their growth forecast for next year.
The recent domestic inflation news had been very encouraging, the group said. Actual inflation was decelerating rapidly; Statistics SA announced a review of its historical CPI data (showing significantly lower inflation since February 2002 compared to previous estimates) and the BER’s inflation expectation survey revealed significantly lower inflation expectations following the spike in inflation (and expectations) during 2002.
“On the basis of the latest developments, the BER has scaled down their forecast for CPI inflation during 2003 and maintained their favourable outlook for 2004. Excluding the impact of lower interest costs from CPI inflation, the CPIX inflation rate is projected at 5,4% on average next year (from 7,1% during 2003).
“This forecast for CPIX inflation is higher than the current consensus. The major reason for the BER’s degree of caution regarding inflation is the fact that services inflation is still running well ahead of the inflation target and it is not clear to the BER that the factors, which are driving goods inflation lower, will impact on services inflation.
“Given the current favourable inflation prospects, the strength of the currency and the tight conditions in the tradable goods producing sectors, the case for further interest rate cuts is most compelling. The BER has factored another 300 basis point decline between August 2003 and February 2004 into their interest rate forecast. This implies a cumulative 450 basis point interest rate cut in the current easing cycle.”
The weak dollar, recovering industrial commodity prices, an eliminated NOFP and improved market sentiment are factors supporting the rand over the short term; factors likely to explain some weakening of the rand exchange rate, particularly next year, include a narrowing interest rate differential and a widening current account deficit.
The BER expects the rand to trade closer to a fair value over the short to medium term with the rand’s fundamental under valuation over the period 2000/1 being eliminated. Unfortunately, the factors driving the volatility in rand movements seem to persist; this will only reverse once South Africa’s external liquidity levels rise to more respectable levels. – I-Net Bridge