Major developments: The most important developments of the past week that would impact on the SA economy are (a) the sharp decline in world equity markets, (b) the increase in the probability of some form of military action by the US in Afghanistan, (c) the slightly lower than expected CPI inflation figures of SA, (d) the significant further depreciation of the rand and (e) the rate cut of Thursday.

Impact on growth:

• The probability that real GDP growth will be closer to 2.5% this year and even lower next year - 2% at best - hasincreased.
• The destructive wealth effect of lower equity prices, particularly in the US, will exacerbate the weakness in the world economy, oberved before the attack on the USA.
• The disruptive effect of some form of war will have the same effect. This will depress SA exports - 30% of GDP.
• The rand's rapid fall increases the chances of higher inflation next year. This will depress growth in real disposable income and therefore in household consumption growth.

Impact on inflation:

• While CPIX inflation might still average about 6.7% this year, the chances of achieving an average of less than 6% next year has become significantly less than 50%, unless there is a reversal of rand weakness. The threat to inflation of higher rand petrol prices has increased significantly with the renewed depreciation of the rand. At this rate of depreciation, increases in prices of other imports also become serious.

Impact on interest rates:

• In the current climate the Thursday rate cut will not do much for growth. A postponement of a rate cut would not have affected the rand exchange rate. No further rate cut until middle of next year seems possible.

Impact on rand exchange rate:

• The significant depreciation of the rand seems excessive, but probably factors in the view that the weakness in world equity markets makes it unlikely that Telkom's IPO will take place next year.