Growth outlook dims, but not SA's optimism
October 31, 2007
By Tonny Mafu
Cape Town - South Africa's economic growth rate will fall to 4.5 percent next year from about 4.9 percent this year, amid slower growth in developed economies and falling domestic consumer demand, the national treasury said in its medium-term budget policy statement.
The mini-budget outlook for next year's growth is lower than the 5.1 percent projected in February's budget speech, although, contrary to expectations, this year's forecast was up 0.1 percentage point from that forecast.
Growth in 2009 is now expected to come in at 4.8 percent, from a previous estimate of 5.4 percent.
However, Razia Khan, the regional head of research for Africa at Standard Chartered Bank, remains bullish on the economy, dismissing suggestions of a slowdown.
"Even if the treasury should cautiously downgrade some of of its growth forecasts in the medium-term budget policy statement, we are not yet ardent believers in a South African slowdown story," she said on Monday.
In terms of government economic policy, growth must average 6 percent a year by 2010 to halve unemployment by 2014.
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ECONOMY:
Real gross domestic product (GDP) growth was 5 percent in 2006. Forecast was revised to 4.9 percent in 2007, 4.5 percent in 2008, 4.8 percent in 2009 and 5.3 percent in 2010.
Current account deficit seen widening to 6.7 percent of GDP in 2007 from 6.5 percent in 2006; and to 6.9 percent in 2008, 7.7 percent in 2009 and 7.8 percent in 2010.
Consumer price index excluding mortgages averaged 4.6 percent in 2006; seen at 6.2 percent in 2007, 5.4 percent in 2008, 4.6 percent in 2009 and 4.5 percent in 2010.
Public sector borrowing requirements rising from 0.3 percent of GDP in 2007/08 to 0.8 percent in 2008/09.
The treasury said the unravelling of the subprime mortgage market in the US had triggered financial problems around the world, as growth slowed in more developed economies - such as Europe - to which South Africa exports.
The International Monetary Fund recently revised downwards growth in the US and other developed economies. The US is forecast to now expand by only 1.9 percent this year and next year, while the euro zone, South Africa's largest trading region, will slow from 2.5 percent to 2.1 percent.
Monetary policy tightening, which began in June last year, has also started to bite.
The SA Reserve Bank has increased interest rates by a total of 350 basis points since then, prompting commercial banks to raise the benchmark lending rate to 14 percent.
Growth in household spending, which has been fuelled by cheap credit, is now expected to fall from an average of 7.3 percent last year to 6.6 percent this year, eventually bottoming out next year at 4.2 percent.
The medium-term budget policy statement mentions the risk of reversal in recent capital inflows into emerging markets. South Africa has received about R226 billion in portfolio inflows into the share market since 2004. The country has already recorded about R62 billion this year.
But the government is cautious. It said: "In the event of a sharply slower world growth or reversal of capital inflows into emerging markets, South Africa's high current account deficit and inflationary pressures could expose the domestic economy to heightened risk, putting pressure on fiscus and the government's development programme."
Despite the less favourable economic outlook, the government has set out a number of measures to speed growth.
One of the interventions is the development of skills to raise the economy's productivity, by drawing more people into the economy as well as stimulating and diversifying the export sector.
The medium-term budget policy statement cites the ongoing investment drive as one of the factors that will help the economy power ahead.
Investment has risen from 15 percent of gross domestic product in 2002 to 25 percent in the first half of this year. The government believes it is will achieve its target of 25 percent by 2014, well ahead of schedule.
South Africa can also count on strong growth in other emerging markets.
China has been growing at a scorching pace of about 10 percent a year, fanning commodity prices as its appetite for resources has soared amid its rapid industrialisation.
ECONOMY: Structural performance 2000-2006
Construction:
This sector leads the way, with growth in value added to the economy of 16.5 percent in the first half of 2007. The industry has been buoyed by the ongoing multibillion-rand infrastructure and fixed investment drive.
Finance, insurance, property, business services:
The sector grew its value added to the economy by 8.2 percent in 2006 before easing to 6.5 percent in the first half of this year.
Mining:
It has been a disappointing sector despite the strong increase in commodity prices. It gained only 0.2 percent in the year to August, with a significant drag coming from gold production, which fell by 6 percent.
Agriculture:
Declined by 1.2 percent in the first six months, with rising input costs and drought taking a bite from farmers' profits.
Manufacturing:
This sector, which accounts for about 16 percent of the economy, grew by only 0.5 percent in the second quarter.
Transport and communication:
One of the few sectors that have thrived because of lower fixed costs, it grew by 6 percent in the second quarter.
Wholesale:
Has shown better long-term growth similar to that of construction, financial services and transport, and grew by 4.5 percent in second quarter compared with 5 percent in previous quarter.
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