South Africa’s growth sectors losing ground

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By Cees Bruggemans

Annualised GDP growth for 3Q2008 was a minimal 0.2%. This was the lowest growth recorded since 3Q1998.

The year-on-year growth profile for 2008 keeps being lowered. The 1Q2008 saw 3.8% growth, the 2Q2008 saw 4.1% growth and the 3Q2008 saw 3% growth. Year to date for 2008 compared to 2007 now measures 3.6% growth.

This already underperforms the most recent National Treasury’s growth expectation of 3.7% for calendar 2008.

If the 4Q2008 were to register only a slight contraction in GDP, with year-on-year growth of as little as 1%-1.5%, calendar 2008 could show GDP growth of 3.0%-3.2% as compared to 5% in 2007.

The 3Q2008 growth data showed stark contrast between the growth champions and the growth detractors.

The fastest growing sectors are also the smallest in size. Agriculture grew by 16% annualized and construction by 15%. But together they barely contribute 6% to GDP.

The fact that these small but strongly performing growth sectors were supported by a few big ones ultimately made little difference to the overall outcome.

Personal services grew by 6% annualized. Transport, storage and communication continued to do well at 4.5%. The government sector did 4%. And the large financial services sector still did a respectable 3%. Together these areas contribute nearly 50% of GDP.

With friends like these one would think there is reasonable chance of delivering good overall growth.

Unfortunately there were also very big sectors going heavily negative in 3Q2008. Mining (-8% annualized decline), manufacturing (-7% annualized decline) and retailers and wholesalers (-7% annualized decline) between them contribute 40% of GDP.

That’s a big deadweight creating a heavy negative drag on GDP growth. Ultimately, the balance between these forces was nearly equal, yielding a puny 0.2% annualized growth.

What about the 4Q2008 and the 1H2009?

Agriculture and construction will keep doing well in 4Q2008, as will the public sector. Communication also looks good for continuing steady growth.

But perhaps less so storage and transport, and financial services, both of which could experience further growth loss. Any loss of growth momentum in these areas could tip the overall scales.

Will mining, manufacturing and retailing remain a large drag on growth?

Global recession and heavily suppressed commodity prices, along with the ongoing electricity constraint, may well keep pulling mining output lower for the time being.

Manufacturing also faces an uphill battle on the export and domestic fronts and may remain a drag on GDP growth. Retail may continue to experience shrinkage from reduced consumer spending after the boom of recent years.

It might therefore well be possible for the 4Q2008 already registering a slight contraction in GDP output, with 2008 overall showing growth of 3%-3.2% as compared to 2007.

During 1H2009 annualized growth in agriculture and construction could well be modestly curtailed. Both these sectors will be working off larger bases, with the weather potentially not yielding ever bigger agricultural bonanzas, capital constraints potentially becoming a constraining factor for certain construction activities, and residential and non-residential building activities showing worrying tendencies.

If weakness in the other sectors were to continue as already evident today, one or more further quarters of annualized GDP decline could materialise.

Along with any decline in formal employment this would probably bring in its wake, it suggests the potential for recessionary conditions for two to three quarters, though some sectors (construction, public sector, communication, agriculture) would in all likelihood continue to show sterling growth contributions.

The main problem would reside elsewhere, in the declines being registered in mining, manufacturing, retailing, motor and building trades, but probably also in transport and possibly in financial services.

That in turn would be a clear reflection of the three great constraining forces on the economy during this period, namely high interest rates, the global financial crisis ending in a commodity price collapse and severe international recession, and of course the lingering electricity constraint.

The ending of the first two mentioned suppressants should eventually herald growth revival for our economy as well. But by then we may be much deeper into 2H2009.

Meanwhile, underperformance of potential GDP growth and resulting resource slack should exert downward pressure on domestically-generated inflation, especially on inflation expectations and second-round effects (wages).

Together with dramatically lower oil prices, the apparent peaking of food prices and the favourable evolution of the global financial crisis probably posing somewhat less downward risk for the Rand than in recent months, this should bolster the SARB’s confidence in its forecast of seeing much lower inflation in 2009 and especially 2010.

Following the lead from financial markets, which are by now discounting more than just a 0.5% rate cut in December 2008, the SARB should be ready to start the process of lowering interest rates with at least a 0.5% rate cut in December.

This could be followed up with more such rate cuts at subsequent Monetary Policy Committee meetings in February, April, June, August, October and December 2009, if circumstances then prevailing warrant such action, potentially taking the prime rate from 15.5% today to 13% by 3Q2009 and to 12% by late 2009.

Going by the intensifying recessionary conditions shaping in the economy, such policy relief would not come a moment too soon for many hard pressed households and businesses.

Source: Cees Bruggemans, FNB, November 26, 2008.

 

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1 comment to South Africa’s growth sectors losing ground

  • Paul C Sandison

    This man is an FNB banker. His agenda is to keep inflation up because the capital value of loans in Rands taken by the FNB, e.g. from other banks, will then wither away through inflation.

    Negative mining growth in SA is due to reduced demand through the international economic slowdown and not due to the national interest rate.

    South Africa does not need another terrible spike of inflation up to 13% which takes over a decade to get down.

    Paul Volcker, who was Treasury Secretary to both Reagan and Clinton struggled for over a decade to get the interest rate in the US down from its high of about 15%.

    It is a long and slow,painstakingly careful, step by step business to get inflation under control, and South Africa has many years ahead of high interest rates slowly coming down.

    Sensible inflation nutters warned the SARB not to lower interest rates mid-2005 when inflation was 5% because it would pour petrol on the flames of inflation and were laughed to scorn by the likes of Bruggemans. And who was right?

    The SARB has learned its lesson the hard way and is not going to slash interest rates now.
    The time to begin reducing interest rates by 1% is when inflation has fallen a full 2% off its high. When
    inflation is eased very very slowly down to 2%, the interest rate at that point in time, say 4%, will be the natural interest rate for the economy and the SARB should then raise or lower interest rates around that figure to keep inflation at 2%.

    If Bruggemans likes high inflation he should move to Zimbabwe.

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