Abstract
This 2008 Article IV Consultation highlights that South Africa’s economic performance has strengthened in the last several years, with real GDP growing by 5–5½ percent in 2005–07, inflation declining to mid-single digits until recently, and employment growing steadily. However, 2008 saw a slowdown in activity, reflecting the cumulative impact of electricity power shortages, the global slowdown, and past monetary tightening. Executive Directors have welcomed the authorities’ pursuit of a prudent fiscal policy, and their intention to maintain a broadly neutral fiscal stance in 2008.
1. This statement summarizes economic developments since the issuance of the staff report. These developments do not alter the thrust of the staff appraisal.
2. In July, annual CPIX inflation reached 13 percent, up from 11.6 percent in June, reflecting a jump in gasoline and electricity prices. Inflation excluding food and energy prices rose slightly to 6.2 percent. Producer prices increased by 18.9 percent relative to July 2007.
3. GDP growth in Q2 was somewhat stronger than consensus at 4.5 percent year-on-year, lifted by good performance in agriculture, nonresidential construction, and manufacturing. Output in the mining sector remained about 5 percent below its level a year ago, despite some recovery from an electricity-shortage-induced slump in Q1. As high-frequency indicators point to a slowdown in interest-sensitive industries, staff’s projection of annual GDP growth in 2008 remains unchanged at 3.8 percent.
4. The current account deficit in Q2 narrowed to 7.3 percent of GDP on an annualized basis from 8.9 percent in Q1 on the strength of merchandise exports. It was financed mainly by net portfolio investment which had been negative the previous quarter. Monthly trade data indicate that imports rose sharply in July.
5. The Monetary Policy Committee (MPC) of the South African Reserve Bank kept the policy interest rate on hold at 12 percent at its meeting in August. The Committee noted the decline in international oil prices and domestic agricultural producer prices, as well as the drop in inflation expectations as measured by the break-even inflation rates derived from the bond market, reflecting the expected technical effect of reweighing and rebasing the inflation index in January 2009. The Committee nevertheless observed that significant risks to the inflation outlook remained.