Tough road ahead for SA

The analysts - who are used quite extensively by the central bank - also made the point that the new weighting changes to CPIX would likely influence monetary policy going forward, and they thus do not foresee another hike in interest rates. In fact, the next time a move is made - which won't be until the middle of 2009 - it will probably be in a southwardly direction.

They note that the degree of monetary easing will depend on how sharply GDP growth slows next year and whether actual CPIX inflation - due to the new weights and/or potential sharp fall in the oil price - turns out to be lower than expected.

CPIX is, nevertheless, expected to peak at a record above 13% year-on-year in September, but based on available information on the new weightings, they see a "high probability" of the 2009 CPIX average turning out to be closer to 7% than 8%.

The forecasters now see CPIX possibly falling below the central bank's upper target band of 6% earlier than expected - before the end of 2009. With the old weights, CPIX was expected to remain above 6% for the whole of 2009.

The new rebased and reweighted CPIX is due to hit trading screens in January, but the ripple effects have been felt since Investec released a report early last week saying inflation would have been 2.2% lower had weightings taken effect earlier.

The BER analysts note that the further confidence decline in the second quarter does suggest that the sharp Q1 GDP growth easing "is unlikely to be a once-off event", but that the actual Q2 GDP - due on August 19 - should show a temporary improvement as electricity supply recovered during the quarter.

Slowing GDP

The BER sees real GDP growth slowing to 3.2% in 2008 from a previous estimate of 3.4% in April.

"The more significant downward revision concerns 2009 where both private consumption and fixed investment are set to be even weaker than in 2008 amid the lagged impact of the most recent interest rate hikes. GDP growth is forecast to decelerate further to 3% during 2009," said BER economist Hugo Pienaar.

In the April BER survey, growth was expected to recover to 3.8% in 2009.

However, the BER does not anticipate a recession, but that certain sectors like manufacturing and retail are likely to be in recession.

The BER does feel that the large external funding requirement of the current account deficit remains an important risk factor for the rand.

"Combined with a projected recovery in the dollar versus the euro over the next 12 to 18 months, the rand is forecast to weaken against the dollar, but to strengthen somewhat against a softer euro," noted the BER.

They forecast the rand to average R8.45 per dollar during the fourth quarter of 2008 and R8.75/dlr in the final quarter of 2009.

From current R7.50 levels, the 2008 fourth quarter average implies a 13% depreciation.

- I-Net Bridge