South African economic growth facing slowdown

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By Kevin Lings

In Q4 2007 SA GDP grew by a very robust 5.3% q/q annualised (seasonally adjusted), up from a slightly revised 4.8% q/q in Q3 2007. SA’s Q4 2007 growth rate was well above market expectations for an increase of 4.4%. In fact, none of the analysts expected growth above 5%, while, strangely, one analyst expected only 2.3% q/q.

Overall, the growth in Q4 was relatively broad-based with almost all sectors of the economy making a positive contribution. The only two sectors to record a decline in output were mining and electricity. As expected, there was a massive rebound in the manufacturing sector, following a decline in Q3 2007. This reflected mostly the fact that the motor industry experienced a strike in Q3, which was alleviated during Q4. The petroleum industry also had a good quarter. The finance and construction sectors continued to grow strongly and provided much of the growth in 2007. The retail sector has slowed noticeably over the past couple of quarters, and is expected to weaken further during 2008.

For 2007 as a whole the economy grew by an impressive 5.1% y/y, but is expected to slow to around 3.2% y/y in 2008.

The key features of the Q4 data were a rebound in manufacturing as well as continued strong growth in financial activity and construction. The ongoing recovery in the agricultural sector is encouraging. Excluding agriculture, GDP grew by 5.4% q/q annualised.

• Agriculture, forestry and the fishing industry grew at an annualised rate of 10,4% during the fourth quarter of 2007. The growth in agriculture can be attributed to good performance in animal production.

• The mining and quarrying industry decreased at an annualised rate of 1.7% during the fourth quarter of 2007. The decrease was mainly due to a decline in the production of coal, gold and mining of other metal ores.

• The manufacturing industry increased by an annualised rate of 8,2% during the fourth quarter of 2007. This increase was mainly due to increased activities in the petroleum products, chemicals, rubber and plastic products industries; metals, metal products, machinery and equipment and transport equipment.

• The construction industry increased at an annualised rate of 14,2% during the fourth quarter of 2007.

• The wholesale and retail trade, and the hotel and restaurant industry increased at an annualised rate of 2,1% during the fourth quarter of 2007. The increase in the former was mainly due to annualised increases reflected by the wholesale trade and motor trade.

• The transport, storage and communication industries increased at an annualised rate of 3,6% during the fourth quarter of 2007. The increase was mainly due to activities related to land transport and communication services industries.

• The finance, real estate and business services industries increased by an annualised rate of 8,5% during the fourth quarter of 2007. This was mainly due to increased activities related to finance and insurance.

A breakdown of the contribution to GDP by sector in Q4 2007 reveals that the main contribution came from finance (1.8 percentage points) followed by manufacturing (1.3 percentage points), and construction (0.5 percentage points)..

The ongoing extremely robust growth in the construction sector is very encouraging, although there has clearly been a slowdown in residential property activity and cement sales. In contrast, civil engineering works remain robust. South Africa has developed a structural short supply of commercial property, especially industrial and warehouse space, the development of which may be limited by the high break-even rentals. The construction industry should be supported by the steady pick-up in infrastructural activity.

The rebound in manufacturing activity is obviously heartening and reflects increased motor vehicle production following the strike in September 2007. It also benefited from a strong performance in the petroleum sector. While a general slowdown in manufacturing activity is under way, key parts of the sector should continue to benefit from the steady increase in infrastructural and general fixed investment activity.

The amazingly strong growth in financial activity probably reflects the still rapid growth in private sector credit (including a strong pick-up in corporate credit), although this has most likely peaked given the recent increases in interest rates.

The decline in mining activity is extremely disappointing and has obviously continued into Q1 2008. The sector has been a long-term disappointment given the extremely high commodity prices. Clearly South Africa has struggled to take full advantage of the favourable international commodity price movements, especially within the gold sector.

The retail sector is clearly slowing down. This should be anticipated given the high consumer debt levels, high interest rates, high inflation and subdued employment growth.

The economy has clearly become increasingly reliant on the tertiary sector (service sectors) for growth, both in terms of consistency as well as vibrancy. In contrast, the primary sectors (in the form of agriculture and mining) have essentially stagnated for a number of years (see chart below on the growing role of the services sector in SA). It is therefore no surprise that the tertiary sector now accounts for 68% of all economic activity in South Africa, while the primary sector comprises a relatively modest 8%, with the secondary sector (e.g. manufacturing and construction) making up the remaining 24%.

stanlib-1f.jpg

While the latest GDP growth estimate is well above expectations, the outlook for the next few quarters points to growing evidence that the economy is slowing. This is evident in the relationship between the leading indicator and GDP growth (see chart below). Motor vehicle and furniture sales have already turned negative on an annual basis. Cement sales and building plans have also moderated significantly, while manufacturing production is slowing despite the rebound in Q4 2007.

stanlib-2f.jpg

Overall, the economic slowdown remains modest, partly reflecting the high base of activity established over the past few years, hikes in domestic interest rates, rising inflation and slowing world growth. More recently, the electricity outages have also put a break on growth, capping the maximum sustainable growth rate for the next few years. We recently revised our 2008 growth rate down to 3.2%, from 4.0% anticipated at the start of the year; 0.5 percentage points of the downward revision relate to the unanticipated severity of the electricity outages. In addition, various indicators of consumer activity have also been worse than was expected at the start of the year.

Source: Kevin Lings, Stanlib, February 26, 2008.

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