Confidence in South Africa’s economy fell to a one-year low in October as demand and manufacturing capacity were seen taking longer to recover, with high power costs further curbing growth and fuelling inflation.
South Africa is wallowing in its first recession since 1992 and spending and manufacturing have fallen sharply. Business confidence rose in the third quarter, although concerns about growth remain.
The Reuters Econometer today showed the index fell to 235.60 in October, its lowest since September last year, compared with 241.51 in the previous month.
The Econometer a measure of six weighted indicators for the medium-term outlook of the economy fell as most analysts downgraded their gross domestic product (GDP) forecasts.
GDP consensus for 2009 was for a fall of 1.91 % before mild growth of 2.33 % next year, and 3.5 % in 2011, with 2010 and 2011 forecasts lower than previous expectations.
“We think the recovery won’t be a smooth process because this is a deep and protracted recession and it will take time for confidence to return,” said Salomi Odendaal, economist at Citadel, forecasting an anaemic 1.0 % growth in 2010.
“Higher power costs will also have an impact on company profitability and consumer spending power as well, so the recovery will be gradual and weak.”
State-owned electricity company Eskom wants to increase electricity prices by 45 % over the next three years, a prospect the central bank has said is the main upside risk to the long-term inflation outlook.
Consumer inflation has gradually inched closer to the targeted band of between 3 and 6 % after peaking close to 14 % in August 2008 and stood at 6.1 % in September.
As inflation has slowed, the central bank has cut its repo rate by 5 % points to 7.0 % since December.
The Econometer poll found inflation was seen at an average 5.79 % next year and 5.85 % in 2011, both forecast higher than September’s.
“It’s obviously Eskom’s hikes a lot of analysts have not considered second-round effects that will be passed onto consumers and it’s going to filter through to the economy, everybody will push up their prices,” said Merina Willemse, economist at Efficient Group.
“If inflation targeting is still going to be considered we’ll have to look at this as a signal that interest rates need to be hiked,” she said, seeing 2010 CPI averaging 7.5 %.
The consensus for the repo rate in the poll was for a mean of 7.19 % by the end of next year and 8.32 % by end-2011, both higher than the previous months forecasts.
Gill Marcus takes over as Governor of the central bank on November 8 and will have to grapple with ongoing pressure from labour and communist allies of the ruling ANC to abandon inflation targeting.
The government has repeatedly said the policy will remain but has promised it will “discuss” it.
On the currency front, the Econometer found the rand was seen weakening slightly in the medium term, ending next year at 8.36 against the dollar and 8.86 in 2011.
The National Treasury and the central bank have worried about the strength of the rand currency and its impact on the broader economy, especially on constraining exports that are key for an economic recovery.
The rand has gained about 25 % to the dollar in 2009.