Rising S.Africa inflation to suppress domestic consumption

JOHANNESBURG (Reuters) - South Africa's economic confidence slipped in January, with expectations of higher inflation seen dragging further on already weak domestic consumption, a Reuters poll showed on Thursday.

The Econometer, a confidence gauge based on six weighted indicators that looks two years ahead, fell to 259.51 in January from 261.53 in December.

Annual consumer inflation is now expected to average 5.71 percent this year, up slightly from the 5.69 percent consensus seen in a December survey.

South Africa changed the weightings in its consumer price index basket for the January release, due on February 20, to reflect the latest spending patterns.

"The new index adds 0.2 percentage points," said Peter Attard Montalto, economist at Nomura.

"But then we have also the feed-through of foreign exchange to non-core inflation, we still see now threats of a wage-price spiral ... or of second round effects."

Consequently, economic growth is expected to be subdued at 2.6 percent this year, while next year's GDP growth forecast was downgraded to a median 3.4 percent from 3.5 percent in the January survey.

"We have had some upward pressure on inflation, so we are getting a squeeze on real disposable incomes," said Dave Mohr, economist at Citadel in Cape Town.

"Secondly, there is always a lag between the world economy turning around and South Africa that works through our exports (meaning that even though) we see the world ... bottoming out, that won't help us that much in South Africa."

The South African Reserve Bank (SARB) also forecast growth at 2.6 percent this year at its January monetary policy meeting and kept its benchmark repo rate unchanged at a four-decade low of 5.0 percent.

Seven out of the 21 economists polled by Reuters forecast this year's growth to slow less than the median 2.6 percent forecast, highlighting the risk of an even weaker performance.

"Our concern for South Africa is that, were the global economy to take another turn for the worse this year ... the country would be very exposed to a withdrawal of capital," said Shilan Shah, analyst at Capital Economics.

Interest rate expectations were unchanged for the next three years from the previous month, with economists seeing interest rates constant at 5.0 percent to year-end, rising to 5.5 percent in 2014 and then by another 50 basis points by the end of 2015.

Source: http://news.yahoo.com/rising-africa-inflation-suppress-domestic-consumption-093053883--finance.html

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