The recent spurt of inflation that has punished South African household budgets for over a year shows signs of abating. The annualized inflation rate dropped below 4.5 percent during the fourth quarter of 2003 and should drop even lower in 2004.

Real household income has not improved significantly over the past year, but the ability of the average South African to purchase imported goods increased as the national currency (the rand) gained value against the U.S. dollar.

The strong rand contributed to double digit growth in the value (year-on-year) of imported consumer goods in recent months and firm demand should persist through mid-2004. Recent reduction in interest rates will put financed purchase of high-end goods within the economic reach of a growing number of South African households this year.

The economic slowdown put downward pressure on consumer confidence during 2003. The situation is not likely to improve soon because South Africa is caught in a recessionary trend that is causing businesses to trim their payrolls. With unemployment running about 30 percent and job-related concerns running high, households are likely to delay high-end purchases requiring financing until late 2004, when signs of overall economic recovery become clearer.

As of the fourth quarter of 2003, overall private sector demand grew at a pace of about 3 percent year-on-year and the growth rate is not likely to increase until at least the third quarter of 2004. The economic quagmire in neighboring Zimbabwe has proven particularly costly for...

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