South Africa’s economy will remain lacklustre this year, helping to cool inflation further, although expected large electricity price increases pose a risk to the outlook, the central bank said on Thursday.
The Reserve Bank said in its twice-yearly monetary policy review recent indicators suggested the economy, and the manufacturing sector in particular, would remain under pressure ”for some time”.
A global downturn, and soft household demand, have knocked domestic growth, with factories suffering record declines in output.
Data this week showed manufacturing production plunged 11,7% year-on-year in March, following the record 15,1% drop the previous month, and that retail sales contracted 5,3%.
The poor numbers point to the first recession in Africa’s biggest economy in 17 years after it shrunk 1,8% in the fourth quarter of last year.
The central bank has responded by cutting its repo rate by 350 basis points to 8,5% since December, aided by slowing inflation. It reduced rates by 100 basis points at the last three meetings and analysts expect more cuts this year.
The policy committee meets again on May 28.
”The global and domestic economic slowdown has had a significant moderating impact on the inflation outlook,” the bank said in the report, adding the policy committee had paid close attention to the gap between potential and current output.
Potential output is seen at 4,5% growth.
”There is a general expectation that growth will be quite disappointing in the first two to three quarters of 2009 due to weaker domestic and international economic conditions, before improving moderately in 2010 and 2011.”
The Reuters Econometer poll saw the economy shrinking 0,57% this year, down from 3,1% growth in 2008.
Power prices
It said targeted inflation was forecast to average 6,2% in the third quarter of this year — still above the 3% to 6% band and higher than previous predictions.
CPI should then accelerate marginally before slowing again to reach 5,4% by the end of the forecast period at the end of 2010.
Headline consumer inflation measured 8,5% year-on-year in March, while producer inflation has braked faster to 5,3%, helped by a stronger rand currency.
However, the bank warned global market volatility and uncertainty made inflation forecasting, and monetary policy-making in general, difficult.
”Inflation is expected to continue to trend downwards, although the volatility of developments in global markets and elevated levels of uncertainty subject inflation forecasts to higher risk than usual,” it said.
The central bank said likely big power price increases and wage demands posed upside risks to the outlook, while the possibility of a deeper and more prolonged global slowdown and more significant moderation in domestic growth exerted a downward bias.
Utility Eskom is likely to push for another electricity price hike of more than 20% this year to help it fund massive infrastructure spending.
The central bank said an independent survey showed average wage settlements running at 10,2% in the first quarter. – Reuters