The Bureau for Economic Research’s (BER) senior economist Dr Charles Martin says that the current economic slowdown in South Africa – which follows on the robust expansion over the past eight years – could start abating from mid-2009.
“A slowdown in domestic economic activity has been mainly the result of an increase in interest rates and sharp rise in food and fuel prices,” he says.
“This has slowed down growth in real disposable income and has impaired the consumer’s ability to spend. Furthermore, consumer confidence has also taken a notable knock, indicating a reduction in the willingness of consumers to spend.”
Martin explains that the sharp rise in inflation and possibly electricity prices will be major factors affecting the economic outlook over the short to medium term.
“It is possible that the Reserve Bank could increase interest rates by a further 0,5 to 1% as a reaction to the increase in inflation, particularly in respect of secondary inflation, as well as to keep inflation expectation under control,” he says.
“This will result in a further negative impact on economic growth. However, a possibility exists that interest rates could drop moderately by the middle of next year, which will help to stimulate economic growth again.
“Until then, the economy, the overall property industry and the consumer can expect a tough time and a period of belt tightening.”
Martin points out that South African economy has to a large extent remained unaffected by the US sub-prime mortgage crisis and its detrimental effect on global financial markets.
“The sub-prime mortgage crisis is a US phenomenon which seems to be bottoming out. However, the crisis is far from over and a period of a year or so still lies ahead during which extensive balance sheet restructuring of home owners and mortgage institutions will have to take place,” he says.
“In the meantime, China and India, which are growing at rates of 8 to 9%, have assisted in the prevention of a global recession arising from this crisis. This is in line with the assessment that emerging markets, which have grown by 6,5% per year over the past five years, can play a pivotal role in keeping advanced economies afloat in the face of crisis. However, even if the sub-prime crisis has not translated into a global recession, it has nevertheless contributed to the slowdown in economic activity in conjunction with, for example, higher oil prices.
“Reduced global economic activity could have a negative impact on the South African export performance. Nevertheless, robust growth in China and India is underpinning overall commodity prices, which are positive for South Africa from an export and terms of trade perspective.
“Overall the main impact of the US sub-prime crisis has been indirectly felt in South Africa via increased investor risk aversion that has resulted in a slowdown in foreign capital as a means to finance the sizeable deficit on the current account of the balance of payments. This in turn has exerted downward pressure on the rand exchange rate. A weaker rand normally implies higher domestic inflation.”
Martin says economic activity is likely to slow down notably in 2008, particularly in the interest sensitive sectors such as residential building and the motor and furniture industries. “Overall growth will, however, be underpinned by strong fixed investment growth of Eskom, Transnet and other governmental infrastructure programmes which are related to the 2010 World Soccer Cup,” he says.
Econometrix expects the growth rate in South Africa to decrease to 3,4% this year from 5% in 2007. This, it says, is predominantly due to slower fixed-investment growth, which is expected to decrease from 15,2% in 2007 to 5,7% in 2008.
Martin forecasts a GDP growth of 3,4% this year “mainly due to lower consumption expenditure growth but counterbalanced by public sector fixed investment growth”. In 2009 it is expected to pick up to 3,8%.
In respect of global growth, most analysts concur that medium-term prospects remains positive, particularly those in emerging markets and developing countries.