In Q1 2011, SA fixed investment spending rose by a welcome 3.1%q/q, annualised. This compares with growth of only 1.5%q/q in Q4 2010 and 1.0%q/q in Q3 2010.
The latest improvement was driven by a further pick-up in investment spending by public corporations (+6.6%q/q) as well as the private sector (+2.7q/q).
Unfortunately, investment activity undertaken by general government (largely provinces and municipalities) continued to decline, falling by 0.5%q/q. This is the ninth consecutive quarterly decline in investment activity by the general government, despite promises and budgets to the contrary.
Remarkably, investment spending by public corporations (which was dramatically boosted by the Soccer World Cup) comprises a meaningful 24% of total investment activity in South Africa, whereas at the beginning of 2000 it was only around 11%. In fact, the pick-up in infrastructural activity over the past few years has meant that private sector investment spending now constitutes around 60% of the total investment activity, and the public sector the other 40%. At the beginning of 2000, this split was 70:30 in favour of the private sector. Ultimately, though, the private sector has to be the engine of growth and job creation in the country, which means the economy urgently needs a more robust and sustained pick-up in private sector fixed investment activity.
The rapid slowdown in the rate of growth of investment activity over the past year has meant that investment spending now represents only 18.7% of SA’s GDP, which is the lowest level since Q3 2006, and extremely low by emerging market standards. The most recent peak was 24.6% of GDP in Q4 2008. The country has an informal target of increasing investment spending to over 25% of GDP and maintaining it at that level for many years. Internationally, there is a reasonably clear relationship between increased investment spending and sustained higher GDP growth (see chart attached), with the level of investment ultimately determining the level of employment.
While reducing the level of unemployment (and hence job creation) has become the number one economic objective in South Africa, the country’s employment target cannot be achieved without a commensurate increase in investment activity by the private sector.
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