/ 18 November 2008

Manuel sees no recession but inflation to fall

South Africa is not facing a recession, Finance Minister Trevor Manuel said on Tuesday, despite major industrialised countries like Japan and the euro zone slipping into negative growth.

The Treasury has argued economic fundamentals in Africa’s biggest economy are sound and the country is largely cushioned from a global crisis, although growth is seen lower at 3,7% this year and 3% in 2009 from an average 5% of the last four years.

”There is no recession,” Manuel told Parliament’s finance committee at a briefing on the global crisis, saying analysis by the Treasury did not suggest the country faced two consecutive quarters of negative growth.

”So we are not looking at a recession in South Africa.”

Some analysts say the economy may have dipped into decline in the third quarter, given a sharp slowdown in manufacturing and mining output and falling retail sales.

Consumers are under severe strain, battling to cope with a total five percentage point increase to 12% in the central bank’s repo rate between June 2006 and June 2008.

Official data last week showed retail sales falling for the fifth month in a row in September, and by 5,1% year-on-year for the third quarter.

New vehicle sales have been falling for more than a year, and contracted more than 30% last month compared with October 2007.

The data has raised speculation interest rates will be cut soon, despite inflation remaining far outside the bank’s 3% to 6% target and the rand being sharply weaker this year.

Treasury director general Lesetja Kganyago said at the same briefing inflation was likely to fall in the current economic environment, gradually leading to lower interest rates.

”In this environment inflation is … likely to fall, resulting in lower interest rates over time,” he said.

Early rate cut
The country’s CPIX consumer price inflation peaked at 13,6% year-on-year in August and is expected to continue declining into 2009, aided by slowing domestic and world growth.

The central bank’s monetary policy committee left rates unchanged in August and October, citing in part an improved inflation outlook. Most analysts now expect rates to begin falling in 2009, although some speculate a cut could come as early as December.

Although South Africa’s banking system has been largely unscathed by the global ructions, markets and the rand have been hit by risk aversion and slower world growth is expected to dampen domestic output.

A reweighting of the consumer price inflation basket due in January 2009 will also likely lead to a drop in inflation.

Kganyago also said a prudent fiscal policy would help offset expected weakness in exports due to the lower global growth, which should keep long-term interest rates low.

The Treasury would, however, use fiscal policy to help offset a short-term economic slowdown, but warned against overly aggressive policy decisions.

”There is no room for policy error… and it will not serve anybody any purpose to be adventurous with macroeconomic policy [in the current global environment],” he said.

Manuel announced last month the budget would shift from a surplus in 2008/09 to a deficit of 1,6% of GDP for 2009/10, partly due to massive government and utility infrastructure spending. – Reuters