In Q3 2011, SA GDP rose by a disappointing and weak 1.4%q/q, annualised (seasonally adjusted). This compares with an increase of 1.3%q/q in Q2 2011. The latest growth rate was below market expectations. Consensus forecast was +1.8%q/q, STANLIB's forecast was 1.5%q/q.
The key positive areas in this quarter’s GDP reading were growth in retail sales and some pick-up in financial services (including increased activity in financial markets, especially equity and bond markets). In contrast, there were substantial declines in agriculture, mining, and manufacturing.
The SA GDP growth estimates were revised back to 2005. At an aggregate level these revisions were not all that dramatic, but there were some significant revisions at a sector level. The SA GDP data is typically revised in the third quarter of every year.
For 2010 as a whole, the SA economy grew by a revised 2.9% (2.8% previously) compared with a revised decline of -1.5% (-1.7%y/y previously) in 2009. For 2011, GDP growth is expected at 3.1% (this has been revised lower during the year), while for 2012, SA GDP growth is now forecast at 2.7%, with risk to the downside. The lower growth projection for 2012 anticipates a negative impact from the weakened global economy (global GDP growth forecasts have been revised down sharply in the past couple of months, especially for the Euro-area) as well as an erosion of domestic consumer activity due to rising inflation.
As mentioned above, the Q3 2011 growth rate was relatively weak, mainly as a result of a decline in mining and manufacturing activity. There was also a further fall-off in agricultural production. Clearly the weakened global economic environment, coupled with supply disruptions and an increase in domestic strike activity, has had a negative impact on the SA economy; especially the goods producing sectors.
Another key disappointment during the quarter was the continued stagnation of the construction sector. Construction activity grew by a still modest 1.8%q/q in Q3 2011, although this is an improvement relatively to the Q2 growth rate of 0.8%q/q and Q1 growth of 1.2%q/q. Clearly, there has been a dramatic slump in building and construction activity during the past two years, which is reflected in the weak cement sales and downbeat residential and commercial property market. Hopefully, these sectors start to improve in the coming year, off a low base, helped by sustained low interest rates.
The service sectors of the economy held-up relatively well in Q3 2011 and would generally have surprised on the upside. This includes respectable growth in retail activity and financial services. The finance, real estate and business service sector added 0.9 percentage points to the quarterly change in SA GDP, while retail added 0.7 percentage points. There was also a relatively large contribution from the government sector of 0.5 percentage points.
Overall, South Africa has now experienced 9 consecutive quarters of positive growth, following the recession in 2008/2009. The growth rate/recovery over the past 9 quarters has actually been fairly reasonable given the severity of the past recession. However, the most recent economic data suggests that the economy has lost momentum. This is reflected in a sharp slowdown of the SA leading economic indicator. Unfortunately, the fairly broad-based weakening in global economic activity coupled with higher domestic inflation will act more fully against SA’s growth momentum over the coming quarters.
South Africa’s current economic malaise, while aggravated by the weak global environment, highlights the urgent need for job creation. Without a meaningful increase in employment, especially formal sector employment, the South African economy will continue to lose momentum, aggravating the already unbalanced and worrying social conditions.
In order to move the South African economy to a sustainably higher rate of job creation there is going to have to be a far more significant improvement in the level of fixed investment activity. According to data provided by the South African Reserve Bank, fixed investment spending in South Africa has fallen to a mere 18.9% of GDP, which is well below the recent peak of 24.6% of GDP achieved in Q4 2008. Investment spending by, in particular, the private sector has been disappointing, despite the fact that interest rates have fallen to their lowest level since 1974 and gross savings by the corporate sector have risen to a multi-decade high of 17.5% of GDP.
Fixed investment spending and job creation are not merely a function of the cost of capital or the value of the exchange rate. A range of policy initiatives are crucial in facilitating economic growth. These include labour policy, education and skills development, competition policy (deregulation), industrial policy, and trade policy.
While a further rate cut would provide some additional stimulus to the economy, asking monetary policy (interest rates) to solve all of South Africa’s economic woes is unfair and unrealistic. Equally, a competitive and relatively stable exchange rate is a necessary, but not sufficient condition for sustained economic success in South Africa. Reducing South Africa’s high level of unemployment requires a far more complete and bolder solution that puts the role of the private sector, especially private sector fixed investment, firmly at its core.
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