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Send  Share  RSS  Twitter  22 Mar 2011

ECONOMY: Domestic Economy Recovers But Growth Remains Uncertain

 





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Positive economic data during the first two months of the year suggests that the domestic economy is enjoying a real recovery. Sustained growth, however, remains uncertain, with the prospect of interest rate hikes on the back of rising food and oil prices threatening to limit the upside potential.

Daryll Owen, Chief Investment Officer at BoE Private Clients, says that while consumer inflation increased only marginally during January, to 3,7%, it can be expected to accelerate over the remainder of the year as a result of rising food prices and further petrol price increases. As a consequence, the market anticipates interest rate hikes far sooner than previously expected.

“As at the end of February, the market now expects the SARB to hike rates by 50bps by no later than the third quarter of 2011 and to raise steadily to 8% by late 2012. We believe that tighter monetary policy aimed at curbing inflation caused by exogenous factors, is not prudent when economic growth remains below potential.

“Rate hikes will have no impact on curbing these exogenous factors directly and where consumers remain subdued, higher rates will do little to curb inflation expectations.” he says.

Owen says that the main feature of the month of February was the rand’s appreciation once more to below R7/US Dollar, despite the increase in geopolitical tension in North Africa and a week-long strike by truckers. He also notes that the JSE All Share Index bounced back with a gain of 2,8% during the month.

While manufacturing production declined from 2.5% to 0.2%, retail sales increased by 0.5% to 8.3% y/y in December. Private Sector Credit Extension increased by 5.6% y/y in January while Money supply growth also showed some improvements and increased to 8.2% year on year in January from 6.9% the previous month.

Economist Mike Schüssler, who compiles the Sake24 and BoE Private Clients provincial barometers, agrees that the domestic economy is in a strong recovery phase but has yet to enter a growth phase.

The Sake24 and BoE Private provincial barometers are compiled from many data series and measure the economic pulse of five of South Africa's provinces (Eastern Cape, Western Cape, Gauteng, KwaZulu-Natal and the Free State). The barometers show that business activity levels in February in all the measured provinces are significantly higher than in February last year, with significant improvements in most sectors.

“Despite these positive signs, the economy has not entered a growth phase. We are now experiencing a transition between a recovery and a potential growth phase. Aside from the impact of possible interest rate hikes, it could take another couple of quarters for sectors like industry and construction to recover completely from the impact of the recession,” he says.


 
 
 
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