Time to tighten the belt

By Staff Writer


From Fin24
November 27, 2007
By Phumza Macanda

Pretoria - South Africa's economic growth quickened in the third quarter, showing that the economy is shrugging off higher interest rates and keeping the door open for another rate increase next week.

Statistics South Africa said on Tuesday third quarter growth stood at an annualised 4.7%, above market expectations of 4.2%, while the unadjusted year-on-year figure also beat forecasts at 5.1%.

"From a broad perspective, it's a very strong number. It's a lot stronger than the market anticipated," ETM economist Russell Lamberti said. "It certainly bodes (ill) for further interest rates hikes down the line."

South Africa's central bank has raised its repo rate by 150 basis points to 10.5% since June to tame accelerating inflation and strong consumer spending, bringing to 350 basis points the hikes since June last year.

Resilient borrowers

The tighter monetary policy was expected to curb demand, but construction and higher corporate borrowing in the finance sector - the biggest contributor to GDP - are proving resilient.Manufacturing, however, was hurt by a stronger currency and strikes.

"Although other sectors are showing a slowdown, faster growth in the finance sector is pulling everything up and the main reason for the faster growth is corporate investment," said Kedibone Mokone, Stats SA manager for GDP.

The finance sector grew by 12.1% compared to the previous quarter and construction quickened by 14.7%. Manufacturing contracted by 2.5%, its worst performance in four years.

Stats SA also revised its economic growth for the 2006 calendar year upwards to 5.4% - a near three decade record - from 5.0%. Economic growth was last at 5.4% in 1981.

Another rate increase?

Faster growth in Africa's biggest economy over the past three years has been driven mainly by bullish domestic demand, but this has added to inflationary pressures.

Analysts said with the economy showing few signs of a strain from tighter monetary policy, the central bank will have fewer hesitations about raising rates again when its policy committee meets on December 5-6.

"Overall, GDP remains firm, and with price stability still the main priority, the way is open for the SARB to tighten interest rates a further 50 basis points next week," said Razia Khan, Regional Head of Research, Africa, at Standard Chartered. "The encouraging news is that despite the interest rate tightening cycle, growth has been largely resilient," she said.

The targeted CPIX inflation pushed further outside the central bank's 3% to 6% band to 6.7% year-on-year in September and is forecast to go even higher in data out on Wednesday.

The central bank has vowed to do all it can to bring consumer inflation back within the band. "The bottom line for us is that these figures (growth) strengthen the case for further tightening next week," said Adenaan Hardien, chief economist at Cadiz African Harvest.

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