South Africa: Country Economic Forecast: 31 Jan 2012

Domestic demand, the key driver of growth in South Africa, continues to grow steadily. The volume of retail sales increased by an average of 1.3% in October and November compared with the previous two months and domestic purchases of new vehicles grew by 10.6% year-on-year in Q4. In contrast, external demand for South Africa's goods has continued to weaken as a result of the deteriorating global environment. Goods exports in US$ terms fell by 2.7% on the year in November, with demand from Europe and Asia shrinking by 12.5% and 4.1% respectively. Moderating domestic demand and the worsening global economic climate mean that we now expect GDP to grow by 2.4% this year. As the global economy picks up, growth is expected to rise to 4% in 2013. Consumer price inflation remained at 6.1% in December, taking the average rate for 2011 to 5%. Price pressures are expected to increase this year, as the depreciation of the ZAR in H2 2011 and rising wages and fuel prices feed through. As a result, we expect inflation to peak at 6.5% in Q2 2012 and to average 6.3% over the year as a whole. The competing influences of rising inflation and a worsening economic environment prompted the SARB to leave the repo rate unchanged at 5.5% at its meeting on 19 January. We expect the rate to remain on hold until Q4 2012, after which gradual rises will be needed to combat inflation.