• International growth recovery is continuing, but uneven and fragile. The major concerns remain the large fiscal deficits, high sovereign debt ratios and structural weaknesses in the economies.
• Interest rates have remained at historically low levels in many developed countries to stimulate economic growth. This accompanied with policy to devalue their currency is a great influencing factor on the South African economy through the exchange rate.
• Economic growth has remained stronger in emerging markets than in developing countries - led by China and India.
South Africa: Economic Performance
Further recovery was registered in the SA economy in the second quarter of 2010, although the pace of recovery has decelerated from the first quarter. The real quarterly GDP for the second quarter was 3.2 percent. The largest contributors to the 3.2 percent growth were the manufacturing sector (1.1 percent), wholesale, retail, motor trade and accommodation (0.7 percent) and finance, real estate and business services (0.6 percent). The lowest contributors were the mining and quarrying sector, which had contracted by 1.1 percent. The real estate and building industry may not recover as quickly as in the past when credit was relatively easy to obtain.
The relative size of the three largest industries contributing to the share of value-added growth were finance, real estate and business services (21.2 percent), manufacturing (15.3 percent) and general government services (13.7 percent).
GDP growth for 2010 is forecast to remain between 2.8 and 3.0 percent -with the manufacturing sector showing the greatest recovery.
The demand side of the economy is also showing signs of slow recovery. Retail trade sales increased, with the spending during the World Cup contributing to the improved performance. Motor trade was also up in the third quarter of 2010. Vehicle sales were up from 294,465 (Jan-Sept 2009) to 400,202 for the same period in 2010. Traditionally motor vehicle sales are a good indicator of economic performance. Caution must however, be observed in interpreting 2010 sales figures as following the recession a large component of sales is replacement-driven.
Growth is Slowing
Manufacturing growth slowed in August (production declined 3.6 percent m/m), with the greatest slowdown in motor vehicles, parts and accessories, down by 19.9 percent in August from July. The production of motor vehicles was down by 39.3 percent in August from July 2010.
The outlook into the future for consumption spending sees growth remaining slow. This is as a result of lower levels of credit extension as credit is not as freely available as in the past. This will likely cause spending to remain linked to the levels of household income and not the ability to leverage credit as in the past. The level of household debt is declining slowly from its all-time high of 82.0 percent of household income in quarter 1 of 2008. The high level of debt serves to further slow growth to household consumption, as credit extension is slowed. Credit extension has increased slightly above expectations to a 3.0 percent increase (y/y) in August, this is mainly as a result in an increased uptake of mortgage loans (up from R5.10 bn in July to R11.30bn in August). Credit cards have continued to decline, contracting by 4.4 percent (y/y) in July and 4.8 percent (y/y) in August. The National Credit Regulator's statistics show that of the 18.3 million credit-active consumers, only 53.1 percent are classified as in good standing. The number of consumers not in good standing continues to increase; the number with impaired records has risen by 212,000 from the first to second quarter 2010.
Capacity utilization in the corporate and industrial sectors is still below ideal levels. This could prove favourable to the IT sector as many companies have delayed IT expansion in the past 2 years and capacity expansion is now set to take off.
The CPI levels have show a downward trend since July 2008 and August figures put the CPI at 3.5 percent (y/y), down from the annual rate of 3.7 percent in July. The monthly price difference was 0.1 percent higher between July and August 2010. Food prices continue an upward trend with an increase of 0.5 percent between July and August 2010. The annual increase in August 2010 over August 2009 was 1.7 percent. Fruit (2.7 percent m/m) and vegetable (1.1 percent m/m) prices increased most dramatically from July to August 2010. It must be noted that global food prices are exhibiting an upward trend, and this is expected to exhibit upward pressure on local food prices in 2011.
PPI figures showed an increase of 7.8 percent y/y in August from 7.7 percent y/y in July. On a monthly basis, prices increased by 0.4 percent. August reflected increases in the electricity, gas and water component. This is mainly attributed to the electricity price increase of 23.1 percent during the month.
Frost & Sullivan concludes that recovery is expected to take place at a slowed pace, with the strong Rand constraining exports and levels of consumer debt, combined with the difficulty to obtain credit, constraining consumer expenditure. High levels of foreign investment are foreseen to continue until the Rand devalues against major international currencies. The pace at which that happens should be a major concern to policy-makers as international inward flows are financing the current account deficit. The Reserve Bank Governor has acknowledged that monetary policy cannot decrease the amount of foreign capital inflows, but that caution should be given to excessive monetary accommodation to avoid future crises. The likelihood of an interest rate cut is gaining momentum when considering declining manufacturing and consumption growth. This is despite the likelihood of petrol price increases amounting to 20c to 30c in November and December 2010.
For more information on Frost & Sullivan's Economic Outlook for South Africa, please contact Frost & Sullivan's Corporate Communications Manager for Africa.