/ 10 April 2008

Economic confidence up, but outlook still bleak

South African economic confidence recovered from a near four-year-low in March, pointing to signs conditions may improve in the medium term, although the growth and inflation outlook remained bleak.

A survey of 22 economists released on Thursday showed the Reuters Econometer, a confidence measure of six weighted indicators, ticked up to 231,39 from 227,02 in February.

The rise pointed to expectations the economy may be in a better position in 2009, but growth was likely to remain subdued this year and inflation under pressure in 2008.

The econometer slipped to its lowest level since June 2004 the previous month as inflation beat forecasts, raising chances interest rates will rise again, and as an energy crisis hit predictions for expansion.

March’s poll showed the consensus mean forecast for the targeted CPIX (consumer inflation less mortgage costs) rose sharply to a 8,75% average this year — up from 8,07% in the February survey.

It should brake to within the 3% to 6% band to a 5,97% average in 2009, and 5,41% in 2010.

South Africa’s central bank faces a tough call on whether to lift its repo rate later on Thursday, with CPIX jumping to a five-year high 9,4% in February.

It may not yet have peaked, and an expected jump in electricity prices could extend its surge.

”As far as inflation goes, we are looking for a peak in March, then we are looking for it to slowdown, but the slowdown is going to be gradual,” Gina Schoeman, economist at Macquarie First South, said.

”The big wild card is that we don’t know what Eskom will get. If Eskom gets well above a 30% increase, and petrol prices continue upwards, then the risk lies that CPIX may move into double digits at some point during the year.”

Power rations

Eskom has asked for a 60% nominal increase in prices to help it cover soaring coal costs and to finance a massive capital-expenditure programme to boost flagging capacity.

The company is rationing power to businesses and households after cutting supply to key industrial customers, including the world’s biggest platinum and key gold mines, in January.

This is widely expected to crimp growth from the average 5% achieved over the past four years.

The poll showed the economy should grow by 3,74% this year before rebounding to 4,89% in 2010. This compared with 3,85% and 4,91% in the previous survey.

”We think we are going to see a consumer-led slowdown in the first and second quarter,” said Rand Merchant Bank economist Kay Muller.

”The consumer is having a rough time with high interest rates and accelerating inflation and oil prices. You can expect quite a marked slowdown.”

The Reserve Bank must weigh a deteriorating growth outlook against the acceleration in inflation that has already exceeded its most recent anticipated peak.

The bank raised its repo rate by 400 basis points to 11% between June 2006 and December last year, before leaving it steady in January.

The local currency has rebounded about 4% against the dollar this month but is still about 12% weaker for the year, weighed down by concerns over growth, political uncertainty and the power problems.

The poll predicted a level of 8,11 to the dollar at the end of 2008, and 8,37 for 2009 and 2010. — Reuters