By Lynn Bolin

The  Bureau for Economic Research (BER) is forecasting the country's GDP growth for 2003 at 2.0% y/y, down from 3.0% in 2002 due largely to the impact of the strong rand and its implications for exports and import consumption, the group said today.

This is lower than the government's forecast of 2.2% as unveiled in the Medium-Term Budget Policy Statement (MTBPS) yesterday.

Announcing the latest revisions in its economic forecasts, the University of Stellenbosch-based group said that although the strong rand had constrained growth in 2003, consumer and investment demand remained strong and should contribute to a "substantial" further extension of the current business cycle, already at a record length.

The negative impact of the stronger rand was showing up in a "clear divergence between domestic production and consumer and investment demand, with the latter growing much more strongly on the basis of lower interest rates and price increases, as well as stimulatory fiscal policy.

"The net effect is expected to retard growth in 2003 and 2004, and we have cut back our expected growth rates to 2.0% and 3.1%, respectively. However, the upswing in the business cycle is expected to continue well beyond 2004, and depending on the behaviour of the rand and the world economy, we may be surprised on the upside."

The BER noted that it also expected the South African Reserve Bank (SARB) to announce a 100 basis point interest rate cut at its Monetary Policy Committee (MPC) meeting in December, the last in the series of rate cuts of 500 basis points since June.

"The MPC has surprised most economists with the extent of the declines in interest rates, and this may suggest a less conservative approach by the authorities going forward," the BER commented.

"However, the current season of rate-cutting may be coming to an end. Although our forecast for the real economy is based on no further cuts in 2003, our latest thinking is that a final 100 basis point cut may be expected in December. After that, short-term interest rates should remain stable for most of 2004. Towards the end of 2004 we do expect rates to start increasing again in response to expected (limited) inflationary pressures in 2005 and the expected further weakening in the balance of payments."

After recording a surplus of 3.3 billion rand in 2002, South Africa's current account of the balance of payments was projected to move to a deficit of 15.6 billion rand in 2003 due largely to the rand, and deteriorate further to a deficit of 20.1 billion rand in 2004.

Regarding inflation, the BER said it was forecasting CPIX (headline consumer price inflation excluding mortgage rates, used by the SARB in targeting inflation) to average 6.0% y/y in 2003, falling to a very low 2.4% in 2004 before starting to rise to the 5% level towards the end of 2004.

The group was also expecting a weakening in the rand against the US dollar in 2004, to reach R8.5 against the US currency by the fourth quarter of the year.

"The rand's strengthening during 2003 may have been overdone and this is showing up in a poor performance of the domestic manufacturing sector and an increasing deficit on the current account of the balance of payments. In 2004 a narrowing of real interest rate differentials and balance of payments pressure should contribute to a depreciation of the rand, particularly against the euro and Asian currencies."

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