Young South African upstart has many years to run

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By Cees Bruggemans, Chief Economist of FNB.

South Africa has completed two years of economic upswing, averaging 3.1% growth (less than our 3.5% long-term average).

Saddled still with much unutilised industrial capacity, labour and buildings following the 2008-2009 recession (at least 5%-10% of those in use remain idled), though parts of its infrastructure straining at breaking point, the economy is far from overheating.

So how long could this business upswing become, how much growth is it likely to generate, and what will end it?

The slow growth so far has its reasons in demand and supply conditions. Some of these will be with us for long, but others may fade, transforming growth speed and resource slack.

On the demand side, the first two years of expansion have seen good real income growth and consumer spending, but high uncertainty and slow-coach investing, with export volumes worryingly underperforming EM peers.

How will this picture change, if at all?

Nominal household income growth should keep running strongly at near 10%. Wage and salary gains will be fed by high global commodity prices, rich government patronage for some, strong union wage demands favouring others, many benefiting from skill premiums as well as informal work gains and job growth of 1%-2%.

With inflation 5.5%-6%, real income gains have tapered off to 3%-4%, driving real consumption.

Fixed investment growth to 2013 is likely to remain modest, held back by supply constraints, public financing and manpower challenges and deep private caution.

Electricity and railway capacity shortfalls keep hampering mining and heavy industry expansion, oversupply and credit access curtails residential building activity, and infrastructure expansion remains ‘challenged’.

This may not add further to household income and spending momentum, keeping GDP growth near 3%-3.5%, with idled resources and output gap still large.

Post-2013 some of these restraints may ease gradually.

Europe will be growing again and less cause of anxiety, US growth should do better while Asia may also grow faster again.

This should favour our commodity earnings (robustly) and export growth (modestly).

There should be much less crisis-fear weighing down on SA willingness to take risk, for households to incur commitments and businesses to expand.

Though electricity and rail capacity constraints will be with us, the physical limitation on expansion may become less acute as we adapt.

Meanwhile, credit and building industries should experience more lift. Current debt burden on household incomes should be proportionately lighter, the country will have adjusted to the national credit act, and credit growth should by mid-decade have normalised nearer nominal GDP growth (10%pa).

By then, housing oversupply should have been digested, ongoing urbanisation and formal employment gains at 2%-3% annually should boost housing demand across all categories and building activity will play catch-up, normalising from present depressed levels (currently still only building at half their normal long-term pace).

By mid-decade three boosters should drive fixed investment considerably faster than presently the case.

Residential building will become a catch-up booster; non-residential building will be in normal recovery as vacancy rates fall off; infrastructure construction may run a little faster as public finance and manpower issues may be a notch easier; and cash-rich companies, less crisis-morose and more confident, led by improving sales and pinched production capacities, should be more willing to commit to faster investment spending.

When will the boardroom greyhairs capitulate?

It will only occur in stages, with one eye on Europe (relax), another beady eye on China (will it pop?), a third on the US (are they crazy?), a fourth on our domestic scene (certified lunar most of the time), and a fifth on our political calendar (2012, 2014), its many beauty contests and ideological voodoo fringes.

But bulging balance sheets, steady sales gains, pinching output capacities have their own logic and will grudgingly overcome all sobriety, conservatism and prudency so expensively acquired during 2008-2012.

With fixed investment growth picking up, from 2% now to 6%-10% in the second half of the decade, the GDP growth performance can also accelerate towards 4% plus.

So it is only post-2013 that we seriously start to eat into the resource slack so evidently present since 2008.

If lucky (!), we may then be granted some years of above average growth. With potential probably still near its 3.5% century-long average, we could be doing 3.5%-4.5% during 2014-2020 without building up too much of an inflation sweat from domestic sources while our budget inches back towards balance and national debt subsides anew nearer 30%-35% of GDP.

During this decade our interest rates may well be very low for long, certainly in the first half and cyclically rising possibly only in the second half, as much guided by global as local conditions.

Until it is time for another interruption, abruptly imposed from the outside (anytime this side of 2020), some severe natural calamity (contagion, drought!) or simply attained eventually through overheating old age.

Bottom line: it could well be a 100-120 month expansion, the longest on record since the Boer War.

Source: Cees Bruggemans, FNB, October 31, 2011.

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