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Articles: Economic confidence seen dipping

Posted by admin on Friday, April 07, 2006 - 12:22 AM

ECONOMIC confidence dipped in March amid concerns a widening current account deficit could trigger a rate hike next year, despite a relatively benign inflation outlook, a Reuters survey showed.
Reuters

The survey of 16 economists published today showed the Reuters Econometer, a confidence barometer of 6 weighted indicators, fell to 275,40 after scaling an all-time peak of 282,88 in February. Analysts had previously expected the Reserve Bank to keep its repo rate unchanged at 7% until next year, but a worsening current account deficit and hawkish comments by governor Tito Mboweni prompted some to revise forecasts upwards. Mboweni last week urged consumers to cut their debt, saying that the bias for monetary policy was on the tightening side. "We are on a joy ride but we have got to be very careful. We have got benign inflation, but we have also got rising private spending and a growing current account deficit," said Mandla Maleka, economist at Eskom. "We cannot ignore these realities and therefore will have to act and pre-empt any potential disruptions that could emanate from any of these variables. Any rate hike is going be more pre-emptive than remedial." The deficit on SA’s current account, a country’s broadest measure of trade, ballooned to 4,2% of gross domestic product (GDP) last year — its biggest in 23 years - from 3,4% in 2004. The survey forecast the shortfall on the current account at R73,64bn this year, deteriorating to R81,08bn next year. The deficit amounted to R64,4bn last year. It has been financed by strong capital inflows, but there are concerns over their composition. The bulk of the inflows are of a portfolio nature and extremely volatile as they can be quickly revised in the event of a shift in sentiment. Mboweni said the Reserve Bank would closely watch the developments on the current account in so far as they might have inflationary consequences. "If we leave it (deficit) unmanaged the market would rectify the imbalance itself. There could be a more dramatic shift by the market than if the Reserve Bank had to take corrective measures," said Colen Garrow, economist at Brait. "One of way of doing it is putting interest rates up and slowing the consumption side of the economy, particularly the demand for goods of high import content." The survey forecast the repo rate at 7,05% by the end of this year, rising to 7,15% next year and falling to 7% in 2008. This compared to February’s predictions of 7,02% this year, 7,03% next year and 6,83% in 2008. The Reserve Bank gradually reduced the repo rate by 6,5 percentage points between 2003 and 2005 as inflation subsided, pushing prime lending rates to a 25-year low of 10,5%. That has ignited strong domestic consumption, which is driving faster economic growth. There are concerns that the deteriorating current account deficit would eventually exert pressure on the rand and stoke inflationary pressures. The survey forecast the rand at R6,35 per dollar by year-end, depreciating to R6,75 next year and R6,89 in 2008. These are little changed from the predictions made in the February poll. The currency scaled a six-week peak of R6,0115 touched on Tuesday after four years of sustained strength. But some analysts are not too concerned about the current account gap, citing the steady stream of capital inflows and reckon benign inflation should see interest rates on hold until the end next year. "Inflation is the major thing to look at. It is slowly picking up because of a very low base last year and over the next couple of months it will start easing again," said Dawie Roodt, an economist at Efficient Research. "If you raise interest rates that might lead to an appreciation of currency which will mean lower rates and more demand for imports. True, the current strong (domestic) demand is not sustainable over a very long period, but in the short term we are not concerned." The survey forecast the CPIX inflation measure, watched by the Reserve Bank for monetary policy, averaging 4,20% this year, rising to 4,61% next year and 4,54% in 2008. In the February poll it was seen averaging 4,31% this year, climbing to 4,71% next year. The annual increase in the index, which excludes home loans, rose by 4,5% in February from 4,3% in January. It has stayed inside its 3% - 6% target band for 30 consecutive months.

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