SA still in deep depression

Johannesburg - Producer price inflation numbers (PPI) for September reflect the severity of the South African recession.

The PPI, which was released by Statistics SA on Thursday, dropped 3.7% in September compared to the same month a year ago. Producer inflation fell 3.2% on a month-to-month basis.

September marks the fifth consecutive monthly decline in PPI. The number surprised most economists, who were expecting an average of 2.8% year-on-year decrease, according to a I-Net Bridge poll.

"This kind of deflation indicates almost no demand in the economy," said Annabel Bishop from Investec Group Economics.

A degree of deflation is necessary in certain instances to restore some purchasing power to households and firms. This is according to Dave Mohr, chief investment strategist at Citadel.

However, he added that the extent of deflation currently taking place in South Africa shows that there's "huge spare capacity in the local economy and abroad".

Although September's PPI indicates a deeply depressed economy, PPI is a typically lagging indicator of economic growth. Therefore, the producer inflation number is not against the popular consensus in the market that the economy has hit its lowest point.

Commentators have said the figures support the view that recovery will be painfully drawn-out.

Finance Minister Pravin Gordhan's forecasts for GDP growth, which he presented on Tuesday as part of his mini budget, were below those of private sector economists.

Gordhan said treasury sees the local economy growing by only 1.5% in 2010, somewhat below economist consensus forecasts of 2.5%.

- Fin24.com