SOUTH AFRICAN AUTO SALES GAIN MOMENTUM.

South African new vehicle sales gained upward momentum during the first quarter of this year in an atmosphere of improving consumer confidence and declining interest rates.

Factors that have boosted consumer confidence in recent months include moderating inflation and a gradual improvement in real household wealth. Household wealth has benefited from increasing real estate values coupled with a hefty increase in the value of the national currency (the rand) relative to the U.S. dollar.

By the outset of the second quarter of this year, new car sales were up 17 percent year-on-year and double digit gains persisted through the first six months. That was the best car sales performance documented in South Africa since 1984. Sales gains should drop into the single digits by the fourth quarter of this year, but demand is not likely to soften very much.

New car sales growth has outpaced used car sales thanks to special offers and innovative financing schemes promoted by dealerships. Interest rates dropped a cumulative 5.5 percent during 2003 and an upturn is unlikely this year.

Benefiting from increased demand for their products both at home and abroad, South African automakers saw growth in unit sales peak at nearly 30 percent (year-on-year) during the first half of this year. That, in turn, will drive up demand for auto industry inputs and equipment as 2004 progresses.

As real wages gradually rise in South Africa this year, an increasing number of households will find that new vehicles are within their financial reach. Nevertheless, South Africa is still a price sensitive marketplace and most of the growth will be noted in models that fall into the mid- to lower-price ranges.

Recent strong gains in new car sales give credence to the theory that South Africa is entering a period of sustainable recovery in private sector consumption. Even though South Africa continues to have major wealth distribution problems that pre-date black rule, a fledgling middle class has emerged and it will increasingly be a driving force in household consumption.

New car sales have benefited from the lack of major price increases over the pas 12 months. However, pending labor agreements will boost production cost and that will ultimately be reflected in higher prices for South African models. Rising fuel costs could hurt sales of large models.