And now for the good news

The economy is the strongest it has been in a decade — but the best is yet to come. Economists believe economic growth could sail above 3% this year, well ahead of the 2,8% originally projected, buoyed by surging consumer confidence and higher manufacturing output.

The economy has grown for the past 22 quarters, the longest period of uninterrupted growth since World War II. Economists say South Africa has broken the boom-and-bust cycle of the past two decades and entered a phase of consistent, though modest, growth.

“I think we’ve left the 1% and 2% annual growth rates behind, and from here we should start to see growth of 4% or even higher, provided there are no serious shocks to the system,” said Brait economist Colen Garrow.

Economists said much of the credit was owing to Minister of Finance Trevor Manuel’s stewardship of the country’s economy — growth has averaged 2,8% a year since 1994, compared to 1,5% a year in the 1980s. The Reserve Bank scores high points for caging the inflation tiger, but has marks deducted for overdoing the policy.

Consumer confidence is at a 16-year high following South Africa’s successful bid to host the 2010 Soccer World Cup. Car sales are at a 20-year high and the rand looks poised to break R6 to the United States dollar, bringing it back to levels last seen in early 1998.

While previous consumer binges were driven by whites for the most part, this time black people are in the driving seat. FNB economist Cees Bruggemans said the hosting of the Soccer World Cup and the African National Congress’s election victory appeared to account for the improving consumer confidence among blacks. Steadily rising house prices were fuelling the consumer boom, as South Africans had more home equity against which to borrow.

Statistics South Africa is reckoned to have undercounted the contribution of services and manufacturing to gross domestic product (GDP) since 1995, knocking perhaps 0,5% off the annual GDP growth rate. It is now revising the way it calculates GDP, which could result in a growth rate of between 3,2% and 3,5% this year.

There’s good news, too, on the manu-facturing front: the Investec Purchasing Managers Index (PMI) has been robust for eight consecutive months, signalling a marked turnaround from last year.

Despite pleadings by exporters for a weaker rand, Garrow says there is now credible evidence manufacturing and mining have learned to cope with currency strength. Strong global demand and higher commodity prices have helped mollify the effects of the strong rand on mines.

“There’s been a tremendous amount of cost-cutting and restructuring by businesses sensitive to the rand, and the benefits are now beginning to show in the form of improved output,” he said. “These companies are well positioned to benefit should there be any [further] weakening in the rand.”

Measured in dollar terms, South Africa’s $1,2-trillion economy now ranks as the 23rd largest in the world, up from 35th in 2002. This reflects the rand’s virility more than substantially increased output, though it puts the country in league with some of the world’s fastest-growing economies.

Consumer inflation, at 1,6%, the lowest it has been in decades, is roughly half the inflation rate in the US and on a par with the United Kingdom. It is likely to average 4,8% for the year, well within the Reserve Bank target range of 3% to 6%.

The strong rand has been the Reserve Bank’s greatest ally in its counter-inflationary battle, but there is a downside: South Africa’s prime rate, at 11,5%, is horribly out of line with other commodity-producing countries such as Australia, where prime is about half the South African level. After deducting inflation, the real interest rate in South Africa is nearly 10%, versus about 1% in the US. That makes it expensive for businesses to expand.

Independent economist Iraj Abedian said domestic interest rates were too high: “If we were to cut interest rates by two percentage points, it would allow the rand to weaken to between R7,50 and R8 to the dollar. Then we could start to see GDP growth of between 5% and 5,5%.”

Lower interest rates would make South African bonds less attractive relative to other markets, prompting foreign investors to look elsewhere for yield. The resultant capital migration would allow the rand to soften. But interest rates are more likely to rise than fall from here, according to a recent statement by the Reserve Bank.

This week credit rating agency Moody’s hinted that it might review South Africa’s sovereign rating in the light of better-than-expected GDP growth. This could result in a rating upgrade, which would make it cheaper for the government and corporations to borrow abroad. “This would free up resources for deployment elsewhere in the economy, which would further stimulate GDP growth,” said Garrow.

Nico Vermeulen, head of the National Association of Automobile Manufacturers, said car sales in 2004 could challenge the high of 301 000 achieved in 1971. The motor sector is enjoying its best year in two decades.

CEO of FNB Corporate Theunie Lategan said the bank had witnessed an improvement in corporate confidence over the past quarter: “Corporate cash on deposit is mushrooming,” he said. “We reckon about 80% of our clients have reorganised their lives to take account of the strong rand.”

Fixed capital spending as a percentage of GDP is about 15,7%, but needs to rise to about 25% if South Africa is to absorb the half a million new entrants to the job market each year — let alone the 32% of eligible workers with no jobs. This should rise as the government plans to spend about R100-billion on infrastructure over the next five years, and private sector investment is also on the increase.

Foreign direct investment slowed to a crawl this year, but should accelerate as domestic growth picks up. Foreign investors are more likely to overlook the perceived negatives — such as the relatively high cost of capital and labour — if domestic growth is robust.

A downside of the current economic upturn is that it has not been accompanied by large-scale job creation. Abedian and Bruggemans agreed that the major impediment to future growth was lack of skills to support an increasingly service-based economy: “Lack of skills, and the impact of Aids, puts a cap on our growth,” Bruggemans said.

The economy by numbers

  • Economic growth averaged 1,5% a year in the 1980s and 2,8% a year since 1994. This year it should break 3%, rising to 4% by 2006.

  • Inflation is down from 14% in 1993 to 0,6% for May this year. It should close the year at about 4,8%, well within the Reserve Bank target range of 3% to 6%.

  • Long-term interest rates are down from an average 16% in the late 1990s to about 9% this year, reducing the cost of government borrowing.

  • The budget deficit is down from 8% in 1992 to 1,5% in 2002 and 2,4% this year.

  • Public debt to gross domestic product is down from about 55% in the early 1990s to 46%. The medium-term aim is to reduce it to well below 40%.

  • Gross fixed capital formation as a percentage of gross domestic product was 15,7% last year, as against 14,5% in 2001. It needs to break into the 20s to make a serious dent on unemployment of 32%.

  • Foreign direct investment slowed to a crawl last year, but should accelerate as the domestic economy picks up steam.

  • The rand has strengthened nearly 60% since bottoming out at R14 to the dollar in 2001. It is now knocking on the door of R6 to the dollar.

  • The Reserve Bank’s forward liabilities, built up in previous years in a vain attempt to steady the rand, stood at $25-billion in 1998. The liability has been wiped out, and positive reserves of about $8-billion accumulated.

  • Financial services is now the largest economic sector, accounting for 18% of gross domestic product, followed by manufacturing (17,8%).

  • Mining, once the mainstay of the economy, now accounts for only 5% of gross domestic product, though the figure is higher if mining support sectors are included.

  • Both Moody’s and Standard & Poors have upgraded South Africa’s credit rating over the past year. This week Moody’s hinted at another upgrade.

  • Exports generated 25% of gross domestic product, versus 10% a decade ago. — Ciaran Ryan

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