Confirmation of slowdown likely

June 2, 2008

Confirmation of slowdown likely

FIGURES due this week will add to evidence of slowing economic growth as markets wait for the outcome of the Reserve Banks monetary policy meeting next week.

The flow of data is thin, but a key manufacturing survey is likely to point to sluggish growth or even a contraction last month in the sector, which makes up 16% of the economy.

Citigroup economist Jean-Francois Mercier believes that the monthly Investec purchasing managers index (PMI) will show a reading of 48,1 its average in the past three months.

Such a reading would be consistent with other indicators of manufacturing confidence and would also point to virtually no growth, he said.

The index, seen as a reliable health gauge for the sector, has been unusually volatile this year, diving in February and March and surging in April. Its rebound was attributed mainly to the timing of the Easter holidays in April last year, which meant output in the same month this year was markedly higher.

The seasonally adjusted PMI index measures sales, orders and expectations among suppliers for local factories, and the 50 level is the cutoff point between higher and lower output. Official data last week showed that growth in manufacturing, the second-biggest sector, fell by 1% in the first quarter of this year from the same quarter last year. That subtracted 0,1% from growth in gross domestic product (GDP), which slowed to 2,1% in the first quarter of this year from 5,3% in the previous quarter.

Finance Minister Trevor Manuel shrugged off the news last week, saying he was confident the economy would still grow by a robust 4% this year. Independent forecasts are less optimistic, predicting annual growth will slow to 3,6% from an average of about 5% over each of the past four years.

For 2008 … we expect GDP growth to dip to 3,4% … as electricity supply constraints, higher interest rates and falling consumer and business confidence weigh on economic activity, Absa Capital said last week.

Hawkish comments from governor Tito Mboweni last week sparked speculation that the Bank would raise its repo rate by a full percentage point to 12,5% this month.

Mboweni said rates could rise by up to two percentage points as part of drastic measures to curb inflation, which has breached its 3%-to-6% target for 13 months in a row.

Analysts think a step of that magnitude last seen a decade ago is unlikely, but markets have also priced in the chance of another half-percentage-point rate hike at the Banks next policy meeting in August.

Vehicle sales figures due tomorrow are expected to show a steep 10% fall versus the same month last year, after a recovery in April, again stemming from the timing of Easter last year.

Higher fuel prices and interest rates will certainly hit consumers wallets, and, while they may not bring vehicle sales to a halt, they will certainly slow growth, said Standard Bank.

New vehicle sales contracted by 5,2% last year compared with the previous year the first annual fall since 2002. Higher local fuel prices are also to blame for the slowdown.


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