South Africa's economic outlook has improved although growth should stay below potential output for “some time”, posing little threat to domestic inflation, its central bank said on Thursday. Developments in the euro area - a major trading partner where sovereign debt worries are growing, sparking global risk aversion - are a risk to growth and may also hit the rand currency, the Reserve Bank (SARB) added in its latest Monetary Policy Review. Africa's biggest economy pulled out of recession in the third quarter of last year and the recovery appears to be gathering pace, with data this week showing annual retail sales rose for the first time in more than a year, signaling households are starting to spend again. Consumer spending was the main driver of average 5 percent annual growth in the five years before the credit crisis, but it has been the slowest to rebound as banks cut lending and more than one million jobs were lost, hurting households' finances. The central bank said in the review - released twice a year - that domestic expenditure appeared to be recovering, while manufacturing output continued to improve. This, though, did not pose a threat to inflation as firms continue to produce below maximum capacity. “Despite the more favorable growth outlook, the output gap is expected to remain positive for some time,” it said. The bank has in the past estimated potential growth at 4.5 percent. The SARB forecast the economy would grow by 3.7 percent quarter-on-quarter and annualized in the first three months of this year, and by 3.2 percent in the second quarter. It recently raised it prediction for expansion in 2010 to 2.7 percent from 2.6 percent - roughly in line with economists' expectations. Statistics South Africa is to publish first quarter growth data Tuesday.
