SA economic outlook 'modest': Reserve Bank

"The economic outlook for South Africa remains modest with a gradual recovery in domestic demand and supply expected, barring further international turbulence," said the central bank as it released the MPR on Tuesday, 29 May 2012.

In the review that is released twice a year, the bank said the increased uncertainty regarding developments in Europe and associated global financial market turbulence had impacted on the perceived risks to the outlook for both domestic inflation and growth.

"These developments pose a downside risk to the hesitant domestic growth prospects," said the central bank.

The report noted that household consumption expenditure continued to provide the main support to the domestic recovery.

"The probability of future growth and financial shocks emanating from global developments remains high. Cost-push pressures emanating from international oil prices and the impact of changes in global risk perceptions on the exchange rate remain the central unknowns for policy going forward," said the Reserve Bank.

Difficulties in the global economy were evident in the second half of 2011. The May MPR noted that growth in emerging market and developing economies had remained quite strong but as the end of 2011 was drawing closer, export and import dependencies and financial contagion effects, among others, resulted in a more generalised slowdown.

"Confidence in the recovery remains extraordinarily fragile due to the still-unresolved European sovereign debt crisis and the halting and inconsistent real economy outcomes," it said.

Additionally, the financial situation of Europe's banks and sovereigns remained the "single biggest risk to the global recovery".

For inflation, upside risks are seen to come from international oil prices and the rand.

"The inflation outlook has improved in terms of both the projected level of the peak and the profile of returning to the target. On balance, there is upside risk to the inflation outlook.

"The main risks to the inflation outlook remain the oil price, administered prices and the impact of global risk adjustments on the exchange rate," said the report.

In November last year, inflation breached the inflation target range but returned to the upper 6% level in March and breached the target range at 6.1% in April.

Consumer Price Inflation (CPI) is expected to average 6% in 2012, 5.5% in 2013 and 5% in 2014.