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South Africa: Recession 'Unlikely' Despite Slowdown
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Business Day (Johannesburg)
14 May 2008
Posted to the web 14 May 2008
Mariam Isa
Johannesburg
STELLENBOSCH University's Bureau for Economic Research (BER) has sharply lowered its growth forecasts for this year and next, but said that a recession was likely to be averted in the short term.
Economic growth will slow to 3,4% this year from 5,1% last year, rebounding to 3,8% next year, the BER said in its outlook for the second quarter.
That is a touch lower than consensus forecasts and substantially below the BER's first- quarter estimate that growth will slow to 3,9% this year, rising to 4,8% next year.
SA's economy was in the eye of a "perfect storm" with three headwinds: the global slowdown, electricity shortages and the return of political uncertainty as the African National Congress (ANC) leadership changed, the BER said.
"Depending on the inflation and interest rate trajectory, the economy is forecast to recover in 2009 (but) the risk is for it to be lower compared with 2008," said BER chief economist Pieter Laubscher.
The Reserve Bank has raised interest rates by 4,5 percentage points since June 2006 in a futile bid to stem inflation, which has breached the upper end of its 3%-6% target range for a full year, mainly due to the soaring cost of food and fuel.
Expected hikes in electricity tariffs are likely to propel the annual rise in CPIX -- SA's targeted inflation rate -- further above a five-year peak of 10,1% scaled in March, forcing the Bank to raise lending rates again, putting more brakes on consumer demand, the economy's main growth engine.
Laubscher said the BER's growth forecasts were based on an assumption interest rates would not rise again, and that the Bank would start cutting in the second half of next year.
"However, there is a real risk that interest rates could increase further, which may constrain and delay the anticipated recovery ," he said.
The BER said the Bank was right to have raised interest rates so far to tame the second-round effects of inflation but the expected electricity price shock should be managed differently.
Power utility Eskom has asked the National Energy Regulator of SA for permission to double electricity prices over the next 18 months -- and even if the request is not granted, prices are expected to rise further than the previously agreed 14% hike, putting more pressure on inflation.
"In the BER's view one option is to redefine the CPIX target to exclude electricity prices, given the special supply factors behind these anticipated hikes," Laubscher said.
If electricity tariffs rose by 20% this year and next -- which he described as a "conservative" estimate -- inflation measured by CPIX would average 9,3% this year, 6,7% next year and return to the target in 2010, he said.
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Electricity prices account for about 3,5% of the basket of goods which make up CPIX. If power were excluded, the rise in the index would average 5,4% next year, subsiding within the target range in the first half of next year.
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