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Economics Editor

ECONOMIC growth may accelerate ahead of expectations as strong domestic demand pulls the manufacturing sector out of its recession this year, according to the University of Stellenbosch's Bureau for Economic Research.

The bureau has raised its economic growth forecast for the year to 2,7%, which is ahead of the market expectation of 2,5%, and closer to government's prediction of 2,9%.

The bureau's senior economist, Pieter Laubscher, said recent manufacturing surveys it had conducted signalled a sharp turnaround in the sector from last year's contraction, which could boost growth in gross domestic product (GDP).

He said buoyant consumer demand had started to stimulate local manufacturing production, compensating for the drop in exports as a result of the strong rand.

The GDP was forecast to rise 3% in the first quarter (on a quarter-onquarter and annualised basis), accelerating to 4% in the second and third quarters this year.

Laubscher pointed to record high levels in the business confidence index, which was conducted by the bureau and sponsored by Rand Merchant Bank, as an indication that economic growth would accelerate from its fairly sluggish pace of 1,3% in the fourth quarter last year.

The index jumped to its highest level in 15 years last quarter, rising to 69 points, after a turnaround in manufacturing sentiment.
The bureau predicted that real domestic expenditure would remain firm this year, rising 4%, as final household consumption expenditure accelerates 3,2%, government consumption rises 3,9% and growth in fixed investment increases 6,4%.

Consumer demand accelerated last year, after substantial tax and interest rate cuts increased consumers disposable income, fuelling a spending spree, especially on durable goods. But with the rand's strength last year, robust consumer spending was channelled into imports, putting pressure on domestic producers.

But Laubscher said manufacturers might now be gaining from the strong demand for goods. "From 1998 onwards, with the rand on a declining trend, and with government's export-focused policies, the environment favoured exporters.

"Exporters may have neglected the domestic market. After the impact of the rand last year, manufacturers have beefed up on the domestic market. They have adjusted to the new situation. We are starting to see a notable recovery in domestic sales of manufacturers."

He said the latest purchasing managers index, compiled by the bureau and sponsored by Investec Asset Management, signalled a possible end to retrenchments in manufacturing last month. This, along with fairly low inflation and stable interest rates, would support domestic demand this year.

"I don't see any reason why domestic demand would slow down."

The bureau predicted that CPIX (consumer inflation excluding mortgage costs) would remain within the 3% to 6% inflation target this year, while the rand would continue to be supported by international factors, such as the dollar's weakness and strong commodity prices.

The rand was expected to end the year at about $7,10 to the dollar, but probably weaken further next year as international factors worked against it.