GROWTH OUTLOOK POSITIVE DESPITE INFLATION

Business Day
Posted to the web on: 14 August 2007
ReutersSA’S economic outlook has improved despite rising inflation and a spate of strikes, the Bureau for Economic Research (BER) said today, and raised its growth forecasts for the year
SA has seen a series of strikes for higher pay in recent months and inflation beating settlements could add to price pressures. The CPIX inflation measure - consumer prices minus mortgage costs - has been above the central bank’s 3-6% target band for the past three months.
"Despite these negative developments the BER is - compared to our previous forecast run in April - more optimistic about the country’s growth outlook," the Bureau said in a statement.
The BER is an independent research group which regularly puts out economic surveys read by fiscal and monetary policy makers in SA.
"To a large degree the optimism is based on the relative ease with which the consumer has so far been able to cope with a more challenging macroeconomic environment", said BER economist Hugo Pienaar.
Growth is now seen at 5,0% this year, unchanged from last year and above the 4,5 and 4,8% predicted in January and April respectively.
Pienaar said expectations that employment growth would remain robust should help to shield the disposable income of households against the negative impact of higher food costs and interest rates.
South African growth has been mainly propelled by high consumer demand, but this has strained domestic supply, boosting imports. A resultant widening of the deficit on the current account has put pressure on the rand, which shed 10% against the dollar last year and has lost another 3,5% to date this year.
The Reserve Bank is also concerned that consumer demand has been largely credit-driven, with household debt shooting up to 76% of disposable income, despite 250 basis points worth of interest rate increases during the 12 months to June.
The bank’s monetary policy committee meets tomorrow and Thursday and most economists expect another 50 basis point increase to 10%.
The BER said growth should slow to 4,8% next year as consumers start to feel the pinch from higher interest rates. CPIX inflation was expected to stay above 6% year-on-year until the first quarter of next year. The 2007 average was projected at 6,2%, compared to previous forecasts of 5,6%.
"In light of the higher inflation forecast the BER expects another 50bps interest rate hike at the conclusion of this week’s MPC meeting," it said.
Beyond the first half of next year the inflation outlook looked more promising, which may result in a moderate interest rate decline during the latter stages of next year.
The BER said it expected only a gradual depreciation of the rand currency, which should be positive from an inflation point of view.