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SA economic confidence up

Confidence in South Africa’s economy edged up in November after it emerged from recession in the third quarter, while inflation should settle inside a 3% to 6% target band despite expected higher power costs.

Africa’s biggest economy grew by an annualised 0,9% in the quarter to end-September, ending nine months of recession that prompted sharp interest-rates cuts to revive strained households and a manufacturing sector stung by a global downturn.

Manufacturing activity and consumer confidence are now on the rise, and the recovery is expected to gather pace next year.

The Reuters Econometer — an index of six weighted indicators — on Thursday inched higher to 235,89 in November’s survey from October’s 235,60. The poll of 20 economists was conducted from November 23 to December 1.

It showed the economy will contract 1,85% this year, roughly in line with the government’s forecast and a slight improvement on the previous poll’s 1,91% fall.

The hosting of the 2010 Soccer World Cup, with its expected 450 000 visiting fans, should help return it to growth of 2,37% in 2010.

”I am a little bit more optimistic than others for growth next year, partly because of a low base,” Colen Garrow, economist at financial services group Brait, said when predicting growth of more than 3%.

Banks, which have cut down on lending to try minimise bad debt, may start loosening requirements as conditions improve, and while consumers remain under severe strain, pressure should ease as the effect of the five percentage points in interest rate cuts of the past year begin to filter through.

”And the World Cup, there will be some impetus from that as well. The outlook for next year is looking more promising than a quarter or two ago,” he said.

Power prices
Most economists see the repo rate of 7% as the bottom of the cycle, and the central bank’s base lending rate should stay flat in 2010, helping the recovery.

The poll put the mean repo rate at 7,18 % at end-2010, pointing to a small minority forecasting an increase before the end of next year, but it should rise at least one percentage point by the end of 2011.

The outlook for inflation was also steady, with the targeted consumer gauge inside the current 3% to 6% band on average for the next two years. It was seen averaging 5,83% and 5,91%.

Energy costs are the main threat to the outlook, both from power and fuel prices.

Electricity utility Eskom relented to pressure this week and reduced its tariff increase request to 35% a year for the next three years, down from the 45% that had angered the African National Congress, trade unions and consumers in general.

The hike, aimed at helping the company pay for much-needed extra capacity, will still have a sizable impact on inflation, though, especially if it provokes second-round effects, like higher food and other prices.

However, relatively weak consumer demand, low money supply growth and global inflation well under control could help dampen upward pressure.

”It [power prices] does have an impact but we do believe that people are underestimating the contraction in money supply and weak demand,” George Glynos, managing director of market analysts ETM, said, adding a relatively strong rand could also help contain inflation. — Reuters

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