South African economic confidence rose in July on the back of an expected mild economic recovery next year and lower inflation, the Reuters Econometer showed on Thursday.
The Econometer rose to 248,17 in July, bouncing from a nine-month low of 242,69 in June.
The measure of six weighted indicators showed that while the economy would contract this year, forecasts for next year’s recovery were better than previous expectations.
South Africa’s economy slid into its first recession in 17 years in the first quarter, with Gross Domestic Product (GDP) falling by 6,4% — its biggest decline since 1984.
July’s poll showed the economy would contract by 1,89% this year while long-term prospects were more optimistic than previous forecasts, with 2,16% and 3,7% growth for 2010 and 2011 respectively.
”About half a percentage point of growth next year comes directly from the impact of the Soccer World Cup,” said Elna Moolman, economist at Barnard Jacobs Mellet.
South Africa is hosting the 2010 World Cup, which is expected to attract up to 500 000 overseas visitors.
”We will also start to see the impact of policy stimulus … although growth will still be below potential,” she said, adding consumer demand would recover slightly in part due to the effects of interest rate cuts starting in December last year.
With the economy struggling in 2009, there was still a slight chance of further monetary loosening this year, while interest-rate rises next year would not be as high as previously expected, the poll suggested.
The South African Reserve Bank (SARB) left the repo rate unchanged at 7,5% in June, citing inflation concerns, after cutting rates by 450 basis points since December.
The poll put the repo rate at a mean of 7,19% by the end of this year — lower than last month’s expectation — and rising to 7,33% by end-2010 and 8,12% in 2011.
CPI firmly on downward trend
Inflation was seen coming down faster, easing pressure on consumers who have been contending with higher prices, heavy indebtedness and falling income.
Inflation was seen averaging 7,26% this year, then slowing to an average 5,82 % next year and 5,59% in 2011.
Headline CPI — which the central bank uses for monetary policy — slowed to 6,9% year-on-year in June.
Inflation breached the SARB’s target of between 3%and 6% in April 2007, peaking at 13,6% in August 2008.
”The main reason we think inflation will be lower is because of weak local demand and huge extra capacity,” said Salomi Odendaal, economist at Citadel, adding that a sharp drop in inflation internationally would spill over to local prices.
”Although it is a bit of an unknown, the strength of the rand is also assisting in keeping importer prices down and we do believe food prices can move substantially lower in the coming months.”
The July poll found the rand was seen ending 2009 at 8,43 against the dollar, and 8,53 by the end of next year and 8,87 by the end of 2011 — all firmer than expectations in June.
The rand touched an 11-month high of 7,6145 in late July and has held on the firmer side of 8/dollar despite some investors’ concerns about ongoing strikes. — Reuters