South Africa’s growth fragility in mid-2010 no joke

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By Cees Bruggemans, Chief Economist of FNB.

GDP growth for 3Q2010 (quarterly annualized) came in at an anemic 2.6%, well below the consensus view of 3.2%.

To add insult to injury, growth for 2Q2010 was revised down from 3.2% to 2.8%.

If there was any world cup growth dividend, it certainly was well hidden in the detail.

SARB Governor Marcus last week described the economy as still “fragile”. That turned out to be no understatement.

The primary sectors steamed ahead, agriculture growing by 16% and mining by 28% in 3Q2010. If only our industrial sectors could maintain such a Chinese-like pace. Instead, the primary sectors today only contribute 8.5% of GDP, too small for even a robust performance by them to have much impact on overall GDP.

Construction has been a locomotive growth sector in recent years, but could eke out only 0.8% growth. Electricity even declined by 2.2% as output peaked at midyear and thereafter fell away under the influence of high tariff increases. These two sectors, however, are also very small with a GDP weight of 5.5%.

Meanwhile, big bruisers such as manufacturing did -5%, financial and business services grew by only 1.5% and government services did only a miniscule 0.4% growth.

Between them these large sectors contribute over half of GDP. Together with poorly performing electricity and construction they represent just over 60% of GDP.

Manufacturing suffered pervasive fallout from industrial strikes, and finance and real estate continue to be hamstrung by anemic credit lending, a very slow property market and a building industry still mired in recession.

One hazards a guess about general government services being so slow. Strike action can here also be one explanation, as could budget constraints, but it might just have been a slow quarter for hiring. The public sector wage increase was higher than budgeted, and it may already have led to slower hiring.

The trade sectors such as retail, wholesale, motor and hotels grew by 3.3%, transport and communication did 3% and personal services also did 3%. These are respectable growth performances, though hot is different.

Still, these sectors carry a big combined weight of nearly 30% in GDP.

These three private services sectors represent the middle ground in the economy, squeezed in between the outperformance of the primary producers and the dismal performance of the big industrial, financial and government hubs.

Yet their mass is too small to give a stronger growth impetus to overall GDP, and thus the disappointment of 2.6% overall GDP growth.

Meanwhile, all isn’t lost.

During 4Q2010 one would expect to see a nice bounce in manufacturing output as the strike effects are no longer there and as factories race to recoup lost production.

The trade sectors, especially retail and wholesale, should ring up a bumper Christmas sales this year, with income growth steadily firming, bonus payouts likely better than last year, low interest rates making themselves felt and South African households already having clawed back three-quarters of the decline in the net-wealth-to-disposable-income ratio observable in 2008-2009, according to SARB data.

Even the financial services industry may perk up a notch as credit growth keeps rising. And government services are unlikely to remain this anemic if one reads the medium-term budget statement right, with the civil service no longer on strike.

Meanwhile we have to wait and see whether agriculture and mining will offer as good performances in 4Q2010, with mining recovering in the 3Q2010 and therefore perhaps losing some steam in 4Q2010. Construction may also still lose some ground, going by contracts issued, but thankfully these are all small sectors making only limited contributions to GDP.

The year-on-year GDP performance has now seen 1.7% growth in 1Q2010, 3.1% in 2Q2010 and 2.6% in 3Q2010, for an average so far to date of 2.5%.

If the 4Q2010 does a respectable 3% annualized, bringing in 3.2% year-on-year, the year 2010 overall will have seen GDP growth of 2.7%.

Only if most sectors put an extra bit of effort in, giving us faster than 3% annualized growth in 4Q2010, would it still be possible to achieve overall 2010 GDP growth of 2.8%, the preferred SARB estimate to date.

That might well still be achievable.

As to 2011, we will need to see much less strike action from the frontline troops in manufacturing and government services (thank you), some more credit lending in financial services (coming up!), a bit of a pickup in the racy trades, transport and communication areas (income, wealth and interest rates induced), not too much of a falloff in agriculture and electricity, and please more “woof woof” in construction and mining.

And Bob could be your Uncle at over 3% GDP growth in 2011. Just!

Source: Cees Bruggemans, FNB, November 23, 2010.

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