Soft patch looms for economy next year :: Namibia Internet Gateway cc ::

Articles: Soft patch looms for economy next year

Posted by admin on Wednesday, December 27, 2006 - 09:41 AM

Ayanda Shezi - Economics Correspondent
THE South African economy has enjoyed 31 consecutive quarters of gross domestic product (GDP) growth — the longest on record — and remains in an upward phase of its business cycle.
Business and consumer confidence are at high levels, and capital inflows continue to pour into the country, supported by a stable macroeconomic and fiscal environment. While the longer-term picture is still a positive one, the local economy is expected to hit a soft patch next year, partly as consumer spending, which has led economic growth in recent years, moderates on the back of a tightening in monetary policy. This is likely to slow GDP growth as well, analysts say. Revised data released by Statistics SA recently show that the South African economy grew 5,1% last year. GDP growth slowed to 4,7% in the third quarter of this year, down from 5,5% in the second quarter, and growth next year is seen slowing even further from these levels. “It will be a challenge for economic growth to achieve a level above 5% for the full year, although it is likely to be close to that figure,” says Argon Asset Management portfolio manager Ntsekhe Moiloa. “Without the prospect of lowered interest rates, we can expect a relatively higher aversion to business risk in certain pockets of the economy. “Overall economic growth is not, however, expected to plummet as there is considerable investment in infrastructure, and this should support employment at least near current levels,” Moiloa says. GDP growth averaged 1,4% in the decade before 1994, more than doubling to 2,9% in the decade after. The 5,1% GDP growth recorded last year was the highest since 1984. The slowdown in economic growth next year is, however, expected to be followed by more robust growth, above 5%, in 2008. The structural change in the economy which has allowed growth to trend higher arises from a number of factors — ranging from a low interest rate environment, significant fiscal relief which included consumers receiving R85bn in personal income tax relief since 1985, rising real disposable incomes, and the emergence of a large number of new consumers, says Brait economist Colen Garrow. Data from the South African Advertising Research Foundation and the Bureau for Market Research indicate that since 2004- 05 about 802000 black consumers had left the lower income levels of the living standards measures (LSM) 1-3, entering higher- income categories LSM 7-9. This migration has been accompanied by robust demand for retail goods. “The dilemma facing the central bank is that it must tighten interest rates sufficiently to slow consumption expenditure, slow demand for imports and in doing so turn the deficit around on the current account of the balance of payments. But, it must do so without derailing the economy,” says Garrow. The deficit on the current account of the balance of payments widened to 6,4% of GDP in the first quarter of this year, but has since narrowed slightly to 5,2% in the third quarter. Worries about the current account, which measures trade in goods and services, are also likely to persist next year, because the capital inflows used to finance the current account deficit are largely short-term in nature. A danger is that the portfolio interests of nonresidents in domestic equities and bonds are susceptible to the sometimes fickle investment sentiment that plagues emerging markets. “The current account deficit will remain a focal point for at least the first half of next year as markets remain concerned about the ability of export growth to counterbalance the strong import growth of late,” says Moiloa. “A good part of the export underperformance has been the virtually nonexistent growth in commodity export volumes in the face of higher global commodity prices.” He says infrastructure investment has to proceed in mining as well as in preparation for the 2010 Fifa World Cup, so a time lag between spending on infrastructure and the financial reward is almost certain. “The size of that mismatch will probably impact on the current account deficit,” he says. The latest government estimate on the amount of funding to be rolled out over the next five years is R409,7 bn. Some of this will be to meet the country’s obligations in terms of infrastructure necessary for the World Cup. “With an overlap in (slower) household consumption, and (faster) gross fixed capital formation, the (slower) impact on GDP growth is not expected to be sustained beyond next year,” says Garrow. If the upward trend in GDP can be sustained, Garrow says, chances are good that SA’s credit rating can progress one notch higher into the A-category sovereign credit ratings, and in the process become more appealing as a long-term investment destination.

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