Rising joblessness remains a key risk to South Africa's recovery

Key Points

• The South African Reserve Bank has cut its repurchase rate by another 100 basis points to 9.5%.
• Producer prices continued to contract in February, but consumer prices rose more than expected.
• The uptick in the CPI will likely be short-lived.
• The central bank has room to continue its monetary easing campaign.
• South Africa's outlook has deteriorated sharply in recent months.
• The risks facing Africa's largest economy remain skewed to the downside.

The South African Reserve Bank lowered its benchmark policy rate this week by another 100 basis points to 9.5%. Rapidly deteriorating domestic and external demand has prompted the country's central bankers to cut interest rates three times since December, by a cumulative 250 basis points. Whilst annual consumer price inflation is still well above target, the combination of weak domestic demand and diminishing global price pressure is expected to drive the annual CPI inflation rate back within the bank's 3% to 6% target by the second half of 2009.

Further rate cuts are likely in coming months in a bid to revive the ailing economy, even though consumer prices rose more than expected during February. Price data released during the week showed that the SARB's new reweighted CPI inflation gauge jumped 1.2% m/m following a 0.4% rise in January, pushing the annual inflation rate further above target to 8.6%, from 8.1% in January.

The pickup in consumer prices during the month was widespread, with most submeasures rising. The large depreciation in the rand on a year-ago basis has also made imported goods more expensive, adding some upward pressure to the annual CPI inflation rate. Nevertheless, the uptick in consumer price inflation will likely be short-lived. Lower global commodity prices and weak domestic demand through most of 2009 will generate disinflation pressures, despite the weak rand. In addition, producer prices continue to contract, falling 0.3% m/m during February and lowering the annual growth rate to 7.3%, from 9.2% in January.

South Africa's economy is on the brink of recession. Output contracted for the first time in a decade in the final quarter of 2008. GDP fell 1.8% in seasonally adjusted annualized terms, after rising just 0.2% in the third quarter. High-frequency indicators suggest another contraction in GDP in the first quarter. With household spending cooling, and with businesses reining in production and investment and cutting staff amid the deepening slump in sales at home and abroad, economic activity will be extremely weak through most of 2009. Whilst looser monetary policy and a moderate recovery in external demand are expected to help put the economy back on track next year, growth will remain well below potential. Thus, South Africa's highly indebted households will still be threatened by soft employment growth next year. Rising joblessness remains a key risk to the recovery. A number of structural imbalances and sociopolitical tensions also threaten the outlook, including uncertainty surrounding the path of economic policy after the national election in April.

This commentary is produced by Moody's Economy.com, a division of Moody's Corporation, engaged in economic research and analysis. Commentary produced by Moody's Economy.com is independent and does not reflect the opinions of Moody's Investors Service Inc., the credit ratings agency which is also a subsidiary of Moody's Corporation. If sourcing this article please quote Moody's Economy.com.

Authors:

Ruth Stroppiana is chief international economist at Moody's Economy.com. Based in London, Dr. Stroppiana is responsible for European-related research on the Dismal Scientist web site. Ruth formerly directed Asia/Pacific economics in the Moody's Economy.com Sydney office as the company's lead economist in the region. She has extensive experience in analyzing countries in the Asia/Pacific region and Europe and has been quoted by a wide range of global news outlets. Dr. Stroppiana received her Ph.D. in economics from the University of Queensland, Australia.

Melanie Bowler is an economist in the Moody's Economy.com London office. Melanie is the key analyst for the Russian, French, Swiss and Irish economies. She completed her M.Sc. in European political economy at the London School of Economics after obtaining her undergraduate degree in economics and European studies at Heriot-Watt University in Edinburgh.

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