Simon Segal reports that though fixed investment has slowed it will continue to underpin economic growth this year
Growth in fixed investment slowed in the first quarter of this year. The slowdown in the growth rate of gross domestic fixed investment (GDFI) to 5,2 percent (annualised and seasonally adjusted) follows heady rises of 19,5 percent, 18,2 percent and 10,7 percent in the previous three quarters.
The slowdown was to be expected.
Consensus among economists is that GDFI will continue to underpin economic growth over the next two years but at a more modest level. But, this is off a dismally low base and the extent to which it can significantly boost economic output and lead to more jobs is limited.
Nedcor’s economists identify R114,2-billion worth of capital expenditure (capex) projects committed between 1995 and 2000: R35,3-billion in 1995, R27,2-billion in 1996, R17,7-billion in 1997, R13,8-billion in 1998, R10,5-billion in 1999 and R9,7-billion in 2000.
This is 16% higher than a year ago when Nedcor identified R98-billion worth of capex projects committed to 1999 — R33,8-billion, R24,7-billion, R16,3-billion, R10-billion, R7,5-billion and R6,1- billion in the respective years from 1994.
Frankel Pollak economist Mike Brown says R61-billion of capex is now in progress, of which two-thirds are private-sector driven, and a further R34-billion worth has been announced.
The trend is clear. Community/social and electricity/gas/water projects are beginning to take an increasing proportion of total gdfi. They now account for 12 percent and nine percent respectively of GDFI.
Brown estimates that R60-billion (four percent of gross domestic product) will be spent on social reconstruction over the next five years — R26-billion on housing, R12-billion on electrification, R8-billion on education, R5-billion on urban infrastructure, R4- billion on land transfer and R3-billion on health.
After plunging 29 percent over the decade to end-1993, and from an average of 26 percent of GDP over 1946– 1985 to only 14 percent in 1994, GDFI is still far from its peak.
At R52,8-billion in the first quarter in real (inflation-adjusted) terms, GDFI is still nine percent below its R57-billion peak at the end of 1989. It has, however, recovered considerably from its low point of R45,6-billion in the first quarter of 1993.
Net domestic investment, which makes provision for depreciation, has grown to R18,8-billion in 1994 from a mere R3,8-billion in 1992.
Most welcome is that the private sector — whose capex rose 10 percent in 1994 compared to a drop of four percent for public authorities and a four percent rise from public corporations — is contributing markedly to this increase.
This trend continued in the first quarter of this year. Private sector investment grew 9,8 percent while that of public authorities and corporations fell 13,6 percent and 0,2 percent respectively.
This trend is significant. As Brown notes, the redirection of capex between 1960 and 1990 away from the private sector (with an output/capital ratio of 0,6 percent) towards parastatals (with an output/capital ratio of 0,2 percent) “was a contributory factor to lower economic growth”.
He adds that public investment towards social upliftment “does not have much direct impact on output generation in the economy”.
So will this turnaround in capex be sustained? Certainly, business confidence has been boosted after the elections and the successful transition.
There is also plenty of scope. Inventory levels, 16 percent of GDP, are at their lowest for 20 years. The investment rate — GDFI as a portion of GDP — fell to a 40-year low of 14,5 percent in 1993.
Following the lifting of sanctions and domestic tax and finance schemes to promote exports, investment in new capacity for export programmes has dominated the recovery in GDFI.
Brown estimates an additional R10-billion in export earnings could be added to the country’s current export base, 17 percent higher than present levels.