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Dennis Dykes
Group Chief
Economist |
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Overview
The South African economy gathered
momentum in 2004, driven by strong domestic demand and
an improved
global economic climate. Growth of close to 4% was achieved
after the relatively modest expansion of 2,8% in 2003.
For the third consecutive year robust domestic spending was
responsible
for driving the economy, while exports staged a modest
comeback after a very weak 2003.
The rand’s continued strength was again the key to
understanding economic trends. It appreciated by 18% against
an ailing US dollar and by 12% against the Reserve Bank’s
basket of currencies, bringing its total appreciation over
the past three years against the dollar and the basket to
114% and 61% respectively. Investors remained confident of
the currency’s short-term outlook against the background
of a fading dollar and took advantage of relatively high yields
on South African investments. Other supportive factors were
the currency’s commodity status and sound, consistent
macroeconomic policies.
A firmer, more stable currency helped to keep most import
prices and inflation in check. More importantly, the decline
in inflationary expectations encouraged the South African
Reserve Bank to bring interest rates down to levels last seen
– briefly – in the early 1980s.This stimulated consumer
spending and credit but, more encouragingly, capital formation
also picked up as confidence in the durability of the upswing
became more entrenched. Firms took advantage of the climate
to modernise plant and equipment and plans for further significant
investment over the next few years have increased. These range
from mining to industry, tourism and construction. The public
sector also became more active, with substantial spending
on infrastructural projects announced.
However, the rand’s strength did have a more dark side.
Exports rose, but only modestly, given the strength of the
international economic upswing and rising commodity prices.
Certain import-replacement industries came under severe pressure
as easing global prices and the firmer rand reduced competitiveness.
Although manufacturing staged some recovery, this occurred
off a low base and was largely based on the pickup in domestic
spending. Significant import growth constrained overall economic
growth, leading to a further deterioration in the current
account deficit.
Outlook
Many of the benign economic conditions that prevailed in 2004
are expected to persist in 2005. The rand is not expected to
ease significantly, given expected inflows related to the amnesty,
crossborder mergers and persistent dollar weakness. Inflation
is therefore likely to remain well within the Reserve Bank’s
3% to 6% target range. Despite a rapid rise in consumer credit
and spending, this makes any strong rise in interest rates
unlikely. Fixed investment activity will also remain strong
as the country
meets infrastructural needs and starts to gear up in anticipation
of the 2010 Soccer World Cup. However, export and import-replacement
industries will remain under some pressure, despite continued
drives to improve efficiencies.
The key risk to growth is the global economic and financial
environment. US and Chinese growth surprised on the upside
in 2004, boosting commodity markets and stimulating other
economies. However, stimulatory policies in the US are on
the wane and severe balance of payments imbalances could have
unforeseen effects on currencies and financial markets generally.
China has also acted to cool its economy. With little prospect
of a strong recovery in Europe and Japan, the combination
could lead to a weaker environment than is generally expected,
which would have negative implications for South African export
prices and volumes. |
