South Africa: Country Economic Forecast: 05 Jan 2011

The national accounts expenditure data for Q3 2010 painted a mixed picture. Once again, consumption was the driver of growth, rising 1.4% on the quarter. In contrast, quarterly investment growth remained weak at just 0.2%, and net exports exerted a 0.8% point drag on GDP growth. As a result of the Q3 result, revisions to back data and the robust household spending figures (which grew 5.5% on the year in Q3), we have raised our estimate for consumption growth in 2010 to 4.6% from 2.6%. In contrast, the ongoing lacklustre recovery in investment, coupled with downward revisions for H1, mean that we now expect investment will have contracted by 3.6% in 2010. Looking ahead, the ongoing crisis in Europe and the ZAR's continuing strength will limit growth in exports. So, despite the better than expected outlook for consumption, we have left our forecasts for GDP growth in 2010 and 2011 unchanged at 2.7% and 3.8% respectively. The immediate outlook for inflation remains benign. CPI inflation rose slightly to 3.6% in November, close to the foot of the SARB's target range, and PPI inflation fell to 6.2%. The low level of inflation and slow recovery enabled the SARB to cut the repo rate to 5.5% in November. But medium-term price pressures and the domestic recovery mean we expect the repo rate to begin rising in mid 2011 and to reach 7% by year-end.