According to Prof Ben Smit, of the Bureau for Economic Research (BER) think-tank at Stellenbosch University, economic growth in South Africa will accelerate to 4,3% in 2005, before decelerating slightly to 4,1% in 2006 and 3,9% in 2007. (In 2004, economic growth averaged 3,7%.)
"We foresee that domestic demand will remain the main source of growth during 2005-7, but to a lesser extent than in 2002-4. However, overall economic growth will remain strong, as exports are expected to improve," he says. "In respect of domestic demand, we foresee that the contributions of consumer and government spending will recede, but that fixed investment (particularly government and public corporation investment) will add more to GDE growth over the period 2005-7."
Global economic growth to remain solid
Global economic growth is expected to remain fairly robust in 2005 and 2006. Within this, global growth is expected to slow slightly through early 2006, picking up modestly thereafter.
However, risks to the global economy are still slanted on the downside. These include a renewed increase in the oil price and a sharp depreciation of the dollar.
The growth in South Africa's export volumes is expected to increase, but to remain modest compared to world trade volumes, as Asia's (South Africa's second most important export destination) impressive economic growth is unlikely to fully compensate for the Euro area's (South Africa's most important export destination) sub par growth.
The current higher crude oil price is here to stay. The BER think-tank projects the North Sea Brent crude oil price to be just a touch short of $60 by end 2005, before declining to $55 by end 2006 and $50 by end 2007.
The BER is of the opinion that the largest increases in industrial commodity prices are over and that prices will retreat somewhat during 2006 and 2007.
Inflation
The higher oil price is expected to cause a temporary increase in inflation in South Africa. The BER expects that South Africa's current account deficit will increase further over the period 2005-07.
"We have assumed that net capital inflows will just about cover the current account deficit over the period 2005-7. South Africa's higher credit rating and unabated economic growth will underpin such capital inflows," says Smit. "We foresee the rand to remain steady against the dollar in 2005, before weakening by 7%-9% per year in 2006 and 2007. A slight decline in foreign exchange reserves and commodity prices will weaken the rand. A stable $/Euro in 2005-6 and a mild dollar appreciation in 2007, an increase in the short term interest rate differential and South Africa's unabated economic growth will support the rand."
"The higher petrol price will push CPIX inflation to above 5,5% at the start of next year, before lowering it toward the mid-point of the target range during the rest of 2006," says Smit. "The normalisation of food price increases will prevent inflation from falling further."
The BER expects monetary policy to be tightened in the first half of 2006, resulting in a one percentage point increase in the prime overdraft rate. This view is based on the continued strong growth in credit extension and the expected further worsening of the balance of payments.
© Technews Publishing (Pty) Ltd | All Rights Reserved
printer friendly version