SA fixed investment spending holding up

By Prieur du Plessis, on December 15th, 2008 posted in: South Africa

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By Kevin Lings

SA fixed investment spending maintained solid growth of 10.0%q/q (annualised) in Q3 2008, up from a revised 6.0%q/q in Q2 2008. (In 2007 fixed investment spending grew by an extremely robust 16.3%y/y, which is the strongest annual growth in investment activity since 1980).

The solid performance in Q3 2008 was mostly driven by the public sector, were investment spending grew by an incredible 28%q/q, annualised contributing around 80% of total the quarterly increase in fixed investment activity. The public sector investment spending is coming off a very low base, but nevertheless the rate of increase since the end of 2006 has been spectacular and is clearly providing a very significant offset to the general economic slowdown in South Africa. In fact, the increase in public investment spending this year, up until end Q3 2008, has accounted for around 60% of the overall GDP performance in 2008. That is not all that surprising given that consumer spending actually declined by 0.8%q/q, annualised in Q3 2008.

Importantly, according to the latest Medium Term Budget Policy Statement, the solid growth in public sector fixed investment spending, especially by public corporations is expected to be maintained over the next few years. This is reflected in the budgeted increases in public sector investment activity across a broad range of infrastructural activity including electricity, roads, harbours, airports, stadium, rail and water (see charts attached).

Investment spending by the private sector has slowed appreciably over the past few quarters, growing by only 2.6%q/q, annaulised in Q3 2008, compared with 11.1%q/q, annualised in Q3 2007. The slowdown in private sector investment activity is obviously expected to continue over the next 18 months given the general slump in domestic and global economic activity, decreasing capacity utilization, limited access to credit facilities, weakening business confidence, concerns over the supply of electricity and a weakening residential property market.

Despite the slowdown in the rate of growth, fixed investment activity reached an impressive 24% of GDP in Q3 2008. This is the highest level investment spending since the beginning of 1984. The country has an informal target of increasing investment spending to over 25% of GDP and maintaining it at that level for a number of years. At this stage SA is well on its way to achieving that target.