Abstract
This 2004 Article IV Consultation highlights that economic growth in South Africa slowed in 2003 to 1.9 percent, from 3.6 percent in 2002, despite strong domestic demand. Fuelled by low interest rates, a more expansionary fiscal stance, and the wealth effects from strong commodity and property price increases, domestic expenditures rose strongly in 2003. Developments in 2004 point to a rebound in growth. Real GDP grew by 3.9 percent in the second quarter and a range of indicators, such as retail sales and consumer and business confidence measures, point to an acceleration in activity.
This statement provides information that has become available since the staff report was issued. The thrust of the staff appraisal remains unchanged.
1. Latest activity indicators support the view that the broad based economic recovery is gaining strength. South Africa’s economic growth rose to an annualized rate of 3.9 percent in the second quarter, underpinned by strong performance in all sectors. First quarter growth has also been revised upwards from 3.1 percent to 3.6 percent, which suggests that the staff’s growth projection of 2.6 percent for 2004 may be exceeded slightly.
2. As indicated in the staff report, the South African Reserve Bank lowered its repo rate by 50 basis points to 7.5 percent in mid-August. The reason explained for the rate cut was an improved inflation outlook, but it had not been anticipated in the market. Since the rate cut, the rand has depreciated by nearly 10 percent against the U.S. dollar.
3. Mild price pressures remain in the pipeline. Although inflation fell further slightly to 4.2 percent in July, the staff remains of the view that some increase in interest rates would be advisable over the next 12 months if inflation is to stay comfortably in the target range of 3-6 percent. Inflationary pressures are likely to develop since domestic demand growth has been very strong, the pace of monetary expansion remains relatively high, and ongoing wage settlements have been well in excess of inflation and productivity gains.
4. Fiscal data through end-July indicate that the budget is on track. While total revenues are in line with budget estimates, revenues from the VAT and the personal income tax have been running well above projections. On the other hand, corporate income tax proceeds are well below target. Public sector wage negotiations, which are usually completed in July, are continuing.
5. According to preliminary estimates, the deficit on the external current account widened to 2.7 percent of GDP in the first half of 2004, from 1.2 percent in the second half of 2003. This deterioration largely reflects the impact of buoyant domestic demand conditions and the strength of the rand on import volumes. It also includes the purchase of aircraft.