South Africa’s economy will grow more slowly than expected in 2006 and 2007 but will weather a weaker currency, higher interest rates and emerging-market jitters, the Bureau for Economic Research (BER) said on Thursday.
The independent research body lowered its latest quarterly growth forecasts for the continent’s biggest economy to 4,3% in 2006 and 4,1% in 2007. In the second quarter, it forecast growth of 4,5% and 4,2% respectively.
South Africa’s economy grew 4,9% in 2005 — its fastest pace in more than two decades — driven mainly by surging domestic demand and a consumer spending spree that has pushed household debt to record levels.
”The BER expects resilience in the first place on the back of healthy structural business-cycle characteristics and a competitive boost to manufacturing activity,” the institution said in a statement.
A slowdown in consumer spending sparked by higher interest rates will not affect higher spending on public infrastructure and private-sector investment, while currency depreciation will boost export growth, it said.
”Furthermore, domestic spending is not expected to contract, only to decelerate from a 6% to 7% pace closer to 4%,” it said.
The rand weakened by 3c to 6,76/dollar after the statement, while government bonds softened. Yields on the benchmark R153 rose by four basis points to 8,39%.
The South African Reserve Bank (SARB) has raised its key repo rate by a full percentage point so far this year, kicking off a cycle of rising interest rates with a half-percentage point increase in June.
That was the first increase since September 2002.
Interest rates to rise
In line with forecasts from SARB, the BER said it expected the CPIX inflation rate targeted for monetary policy to breach the upper end of its 3 % to 6% target range in the first quarter of 2007, subsiding to 5% by the year-end.
But it said the spike was likely to be one-off, contrasting with SARB forecasts that the annual increase in CPIX will remain above 6 % for the first two quarters of the year and fall to 5% by the end of 2008.
The BER prepares a regular quarterly inflation-expectations survey, which the SARB releases at the end of some of its monetary policy meetings.
”The BER anticipates a further 50-basis points increase in the repo and prime rates before the end of the year; long-term interest rates are already discounting this prospect,” it said.
”There is a risk of additional monetary policy tightening should the currency come under bigger pressure.”
The rand has depreciated by more than 6% against the dollar in the year to date, but has recovered strongly in the last few weeks after hitting a two-and-half year low of 7,52/dollar in late June.
The research bureau said pressure for higher domestic interest rates came mainly from the changed global finance environment and South Africa’s vulnerable balance of payments, which has been hit by rising imports, the BER said. — Reuters