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Still looking good - the economy

23 January 2006 Angelo Coppola

DR Kees Bruggemans, chief economist at FNB, says the economy has strong natural growth potential. External conditions are driving this and these self same factors could well end it, although he doesnt see that happening in the short term.

In terms of consumer confidence, were are at 25 year highs, and this is not the end. There is a difference between white and black consumers, with both sectors with different perspectives, with a gap developing between white and black, with the white sector feeling less confident.

He maintains that we will go to higher levels, and the retail performance is set to continue. There is employment growth, and a positive frame of mind al leading to this prediction. He also sees a gap developing between high income and low income earners.

An external factor, such as the oil price, could become a major factor, and says that there is a possibility of an increase in the medium term. This is an important input into inflation numbers.

At the other end of the scale, the commodity prices are booming. On the balance of payments sector, surprisingly there is a continuous flow of capital into the country, which reflects in the firmness of the local currency. While it came back somewhat against the dollar, the question is whether international currencies remain stable, as the dollar corrects? A R5 to R6.50 to the dollar range is anticipated.

In terms of CPIX we will be hugging the lower end of the 3% to 6% range for the year, with interest rates at record levels, and if this maintains then there is a possibility of interest rate cuts, something that wasnt evident in the last half of 2005. The real interest rate should however be kept in mind, and it seems that the Reserve Bank is targeting the real interest rate.

The market is already discounting an interest rate cut, although nothing is anticipated at the MPC meeting next week. There are six meetings this year. At this point there is no scope for a cut now, however.

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