January 21, 2004

By Vernon Wessels

Johannesburg - Economic growth was unlikely to exceed 3 percent this year despite the massive monetary stimulus of five interest rate cuts totalling 550 basis points last year, a Business Report survey of 10 economists showed yesterday.

Economists were not betting on further interest rate relief or a dramatic depreciation in the rand, while inflation was expected to remain subdued and within the Reserve Bank's target range.

The vicious volatility seen in the rand was identified not only as the wild card in economic projections but also the single biggest challenge facing authorities and companies that need to operate in the unpredictable foreign exchange market.

The most severe drain on economic growth was likely to come from the drought-ravaged agricultural sector, which was already trapped in recession last year.

However, growth would accelerate beyond 3 percent next year, as the world economy gathered pace and domestic companies improved their competitiveness, the survey showed.

Christo Luös, the chief economist at Absa, was concerned about the impact of the drought on food price inflation. "We have already seen a huge increase in international food commodity prices of 20 percent, which could have a significant impact on our inflation."

Brait economist Colen Garrow, who predicts that 2003 growth fell to below 2 percent, said the economy needed the rand to retreat to R9 or R8.50 to the dollar to create jobs. Significant growth could only be stimulated by the export sector. 

Arthur Kamp, an economist at HSBC, said the economy still needed to adjust to a "rand that was no longer the automatic selling currency of the world". Productivity improvements still needed to filter through to boost the country's share of global exports.

Peter Worthington, the director of emerging market economics at Credit Suisse First Boston, said that although the economy was structurally sound, the strong rand had resulted in imbalanced growth: the export, manufacturing and tourism sectors had suffered while consumers and retailers had benefited.

Nedcor chief economist Dennis Dykes said the economy could be given a powerful boost if the rand settled around R7.50 to R8 against the dollar, interest rates remained low and the international economic recovery proved sustainable.

Cees Bruggermans, the chief economist at First National Bank, was loath to predict the rand's value at the end of the year as it was "a game you can only lose" because of the wild swings in the unit.

If, however, the currency remained stable, oil prices fell, productivity improved, inflation for services such as education remained reasonable and there was relief from the drought, the prime lending rate could measure 11 percent at the end of the year, he said.

Nazmeera Moola, an economist at Merrill Lynch, was "comfortable with the idea that the rand will more than likely be below R7 a dollar after the elections".