South African Inflation Rises Again In August

South African inflation hit a record annual level for the third consecutive month in August, reaching 13.6 percent, as electricity and food costs continued to rise. The CPIX inflation rate, which excludes mortgage costs, increased from 13 percent in July according to today's data from the Pretoria-based Statistics South Africa. Prices were up by 0.9 percent month on month.



The central bank has increased its repurchase rate by 3 percentage points since June last year to the present level of 12 percent as inflation soared above its 3 percent to 6 percent target range.




The bank now expects inflation to drop within the target by the second quarter of 2010. Higher interest rates have also hurt consumer spending, and retail sales are falling, dropping by a record annual 4.6 percent in July, according to separate data from the statistics office. This is the fifth consecutive month in which retail sales have fallen. Consumer spending growth slowed to an annualized 1.2 percent in the second quarter, the lowest in more than five years, and South African vehicle sales plunged an annual 30 percent in August, the biggest drop in 14 years. Manufacturing output growth was also down to a year on year 3.3% in July.

The weakening in the economy, and the probability that inflation may now be about to slow make further rates increases unlikely in the short term.

South African Manufacturing Output Slows In July, Rand Decline Continues

South African manufacturing growth slowed to an annual 3.3 percent in July as higher interest rates continued to damp consumer spending. Growth in manufacturing output - which accounts for 16 percent of the South African economy - fell back from a revised 5.7 percent in June, according to data from Statistics South Africa earlier this week. Output fell a seasonally adjusted 0.4 percent in the month. Manufacturing output of food and beverages were down by an annual 3.3 percent in July, textile and clothing production dropped an annual 5.2 percent in July, while vehicle output declined 5.1 percent.

Sales of manufactured products have fallen considerably since the central bank began increasing the benchmark interest rate in June 2007. It has now been raised six times to the current 12 percent rate. The slowdown in manufacturing suggests that growth in Africa's largest economy, which rebounded to an annualized 4.9 percent in the second quarter from 2.1 percent in Q1, may now be slowing again.




The Reserve Bank left interest rates unchanged on Aug. 14 as consumer spending eased and it forecast inflation, which reached 13 percent in July, will slow significantly in the last quarter of the year. The bank will very likely begin lowering interest rates late in the first half of 2009.



There have been clear signs recently that domestic consumer demand has been weakening. Vehicle sales fell by an annual 30 percent in August, the biggest decline in 14 years. Retail sales fell for a fourth consecutive month in June, dropping by an annual 2.6 percent.

Falling Rand

South Africa's rand slipped back to its lowest level since May 2003 against the dollar following publication of the manufacturing report. This was the third day the rand has fallen as platinum, South Africa's most important export, slumped to a 20-month low and gold also declined. The rand droppedat one point by  as much as 1.5 percent to 8.3322 per dollar, touching the weakestlevel  since May 2003, although it was back at 8.3258 by 4 p.m. in Johannesburg. 



South Africa produces about 10 percent of the world's gold and almost 80 percent of its platinum, and the rand often  moves in tandem with these commodity prices. The movement in the value of the rand has been almost constant since late July now, as the dollar has risen steadily, reflecting in part declining global risk sentiment.

South Africa's business confidence index fell 11 points to 34, marking its eighth quarterly decline, according to the survey published by Rand Merchant Bank yesterday. The index is now at its lowest level since the first quarter of 2001.

South Africa's Current Account Deficit Slightly Lower In Q2 2008

South Africa's current account deficit narrowed to 7.3 percent of gross domestic product in the second quarter as power outages eased, boosting gold and platinum exports. The deficit shrank from a revised 8.9 percent of GDP in Q1, according to data from the Pretoria-based Reserve Bank.

Electricity supply stabilized in the second quarter after power outages forced mines to shut for five days in January, enabling a rebound in exports. Imports also gained as the government stepped up spending on stadiums, roads and power plants, keeping the deficit above 7 percent for a fourth consecutive quarter.

The deficit narrowed to an annualized 164.4 billion rand ($20.9 billion) in the second quarter from 194.6 billion rand in the previous three months.

South Africa relies mainly on foreign investment in stocks and bonds to fund its import needs, inflows that began to dry up in the fourth quarter as investors sold riskier, emerging market assets. The rand has fallen 13 percent against the dollar this year on concern South Africa will struggle to finance the deficit.

The country recorded an inflow of portfolio investment of 27.3 billion rand in the second quarter, compared with an outflow of 19.1 billion rand in the previous three months, the central bank said. The deficit has widened in the past two years as the government boosted spending on road, rail and power infrastructure in preparation for hosting the 2010 FIFA World Cup. About 40 percent of the equipment needed for the 568 billion rand infrastructure program will need to be imported, according to government estimates. The government expects the deficit to reach 7.9 percent of GDP in 2009 and 8 percent in 2010, compared with an estimated 7.3 percent this year.

Export volumes rose an annualized 12.2 percent in the second quarter after dropping 7.2 percent in the first three months of the year, the central bank said. Higher gold and platinum prices helped to boost the value of exports by 20 percent to an annualized 682.1 billion rand in the second quarter. Imports rose 12 percent to an annualized 760.9 billion rand in the same period, the central bank said.

South African Mortgage Growth Slows In August

According to the Absa Group, which is South Africa's biggest mortgage lender, South African house-price growth slowed to an annual 1.7 percent in August, the slowest pace since January 1993, as rising interest rates curbed demand. Growth in house prices fell back from a revised 2.6 percent in July. The average price of a house was 962,500 rand ($122,294) last month. Adjusted for inflation, prices in the middle-segment of the market dropped by an annual 9.6 percent in July, the sixth monthly decline in real terms, and the biggest drop in real terms since November 1992.