South Africa is topping 10% nominal growth

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By Cees Bruggemans, Chief Economist of FNB.

There remain many people who seem to think South Africa’s economic upswing was slow in taking off in the year to mid-2010, and they aren’t entirely wrong.

But they wouldn’t be entirely right either.

For the take-off was done at quarterly annualized rates of near 11% (nominally in money-of-the-day).

That’s not all that slow, really. Especially considering this was the SAME pace of growth in gross domestic spending as in 2007 (the last year of prosperity proper).

And this at average inflation somewhat higher in 2007 (+6.5%) than in the year to mid-2010 (+5.3%).

But there is a twist.

In 2007, household consumption spending was still growing at a 12.5% pace, compared to only half that pace (+6.5%) in the year to mid-2010.

Similarly, fixed investment spending grew at a 20% pace in 2007 compared to still falling in 2H2009 and growing at less than a quarter that pace (+4.5%) in 1H2010.

Yet both periods saw total domestic spending advance at the exact same speed of 10.8%. How’s that?

Two more pieces of information are needed.

In 2007, government spending increased at an 11% pace. In contrast, in the year to mid-2010 it did nearly half faster at 15.5%. Government spending was certainly helping us to get out of the recession. No evidence of any slowdown in budget allocations.

But perhaps significantly, in 2007 the economy was slowing the pace at which it was adding inventories, which is GDP negative.

In contrast, in the year to mid-2010 inventory destocking eased significantly, from a pace of –R106bn in 2Q2009 to –R30bn in 1H2010, which was heavily GDP positive.

So whereas households and fixed investment were still serious drags on GDP acceleration in the recovery so far, there was a substantial kickback to growth from the change in inventories and government spending.

There is nothing untoward about any of these features, especially the cyclical impact of inventory changes. What is important, however, is how final demand evolves as we move forward.

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In the period ahead, the positive inventory effect for GDP growth is clearly going to ease off.

As things stand, we haven’t quite fully lost this positive growth contribution yet, for the economy still has to get from an inventory drawdown amounting to a pace of –R30bn in 1H2010 to a positive inventory addition of R20bn to R40bn when the expansion fully hits its stride.

Still, this change will likely be spread over the coming two to three years.

But as the positive inventory effect wears off, we have reason to believe going by previous cyclical expansions that other components of spending and output will be steadily accelerating their contributions.

Household spending was already doing 8% by 2Q2010 and will probably accelerate to nearer 10% in 2011.

The slowest coach on past performance may well be fixed investment, given much spare capacity and lingering business skepticism about what’s happening in the world and to what degree one should commit to more fixed investment shortly.

Still, the pace there is also slowly accelerating. It may be doing higher single digit growth into 2011 and even slightly faster in 2012.

So the economy’s spending (and output) performance will likely be slowly rotating away from inventory effects and towards household consumption and business and public sector investment spending as the cyclical expansion matures, gradually picking up more speed in time.

Restrained credit lending and electricity capacity will likely constrain domestic growth.

Another growth negative will probably be the firm Rand, which potentially could go yet stronger, eroding some of the export potential, favouring faster import volumes, depending on what happens overseas these next few years.

Yet their respective price effects may work the other way. The country has already enjoyed a sizeable increase in its export prices relative to its import prices, thereby imparting a positive income shock to the economy (the biggest in sixty years this past decade), part explanation why things keep advancing domestically.

This net benefit may yet have further to run, given the remarkable conditions prevailing internationally, despite already having benefited us so much to date.

This in addition to the strong support offered by state spending and the 30-year lows of our interest rates.

So both domestically and externally, growth impulses are well developed to keep on supporting the economy as we move through our second year of expansion.

As the composition of output and spending change, so the sustainability of the cyclical expansion should continue to improve.

We are currently only still in the very early stages of expansion, with probably years to go before we lose the benefit of the many global forces currently supporting us so richly while fully exhausting the cyclical ability of the economy to advance without building up non-sustainable imbalances.

At some point this expansion will also end. But for now it seems to have long legs, both globally and domestically. We seem to have barely started.

Source: Cees Bruggemans, FNB, January 13, 2010.

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