Growth forecast lower

"For 2010 as a whole we have made a downward adjustment (from 3.4% in April to 3.1%) in the GDP growth forecast," said the Bureau for Economic Research (BER) in its economic prospects statement on Tuesday, 27 July 2010.

According to the BER, two thirds of the 2010 growth is forecast to be the result of an end to the huge inventory decline that was witnessed in 2009.

"One of the implications of this growth mix is that the underlying conditions in the economy may remain weaker than what would normally be characteristic of a 3.1% real GDP growth environment," said BER senior economist Hugo Pienaar. As a result, no job growth is forecast for 2010.

Domestic expenditure

Growth in gross domestic expenditure is expected to ease to 4% from 4.7% in 2011. "The 2011 GDP growth acceleration stems mainly from a smaller negative net export contribution - given the uncertain global outlook, there is a risk that this may not materialise," said the BER.

The BER said inflation data confirmed that the Consumer Price Index (CPI) remained on a downward trajectory. CPI eased to 4.6% (a new four year old low) year on year in May compared to the 4.8% recorded in April.

"The BER remains with the view that while consumer inflation should remain contained for the rest of 2010 (CPI set to average 4.8%) price pressures may start to build in 2011 (averaging 5.7%). Our updated forecast suggests that CPI will reach a trough of 4% year on year in August 2010 before slowly starting to tick higher and ending 2011 just below the 6% mark at 5.8%," said the bureau.

No September repo rate cut expected

The BER's view of the repo rate, which the central bank decided to keep unchanged at 6.5% at its meeting last week, remains that there will be no further monetary easing at the MPC's next meeting in September. This was despite argument for a rate cut due to benign inflation, Rand strength and the uncertainty relating to the sustainability of global growth.

"At this stage, we remain with the view that the policy rate will be increased by 100 basis points during 2011. However the timing of the first move higher has been shifted out from 2011 quarter one to the third quarter as the central bank will want to be sure that the economy is on a more solid footing before starting to tighten monetary policy," said BER.

The Bureau expects the Rand to average R7.75 in quarter four of 2010 before it weakens to average R8.45 in the last quarter of 2011.