With the South African economy expected to continue to grow slightly above potential this year, underlying inflationary pressures persist and the risk of higher rates remains skewed to the upside, say leading global economic analysts Moody’s Economy.com.
The analysts point out that despite the South African Reserve Bank’s (SARB) steady dose of monetary tightening since mid-2006, higher borrowing costs have done little to dampen demand, with consumer spending and credit creation continuing to grow at a robust pace in the opening months of the year.
Retail sales growth reaccelerated in March, surging 10,1% year-on-year compared with the 8% increase in February.
“In real terms, borrowing costs may still be too low to put a substantial dent in consumer spending or the demand for credit. The finance minister flagged as much in a speech this week, crediting ‘private-sector credit extension’ with the role of the central bank’s biggest worry.
“Given the improving employment conditions and rising incomes, coupled with the positive wealth effect of solid house-price growth and a surging stock market, the outlook for consumer demand and economic activity in South Africa remains robust,” explain the analysts.
They add that while South Africa’s central bankers still foresee annual CPIX inflation remaining within the 3%-to-6% target level through 2007, they acknowledged in their review this week the recent deterioration in the inflation outlook, citing international oil prices and domestic food prices as the major upside risks to future price growth.
“Although the release of March’s retail sales figures on Wednesday had very little impact on local financial markets, sales volumes continue to defy most predictions of a gradual retrenchment in the consumer spending boom.
“In recent years, consumer spending has been the major driver of the economy, helping Africa’s largest economy grow above potential at around 5% per annum. Retail sales surged 9,3% year-on-year in the first three months of the year, accelerating slightly from the 8,9% rise in the final quarter of 2006.
“As retailing is the third-largest sector of the economy and a key gauge of consumer demand, this bodes very well for the country’s first-quarter GDP numbers, which are scheduled to be released at the end of this month,” say the analysts.
The GDP data is due at 11.30am on May 29, while credit data is due the day after at 8am.
SARB Governor Tito Mboweni, meanwhile, will speak in Cape Town on May 23, and given the context of the policy review, he is expected to be closely questioned on the interest-rate outlook.
“It could be time to start prepping the ground for a hike,” conclude the analysts. — I-Net Bridge
On the net
The SA blogosphere on interest rates