2ND QTR
FIGURES ARTIFICIALY INFLATED BY SEASONAL ADJUSTMENT
Analysis of the national accounts data for the 2nd qtr published by the
Reserve Bank broadly reveals the continuation of trends in evidence in the 1st qtr. To
some extent this is reflected in the fact that the y-o-y growth rate in GDP was virtually
unchanged in the 2nd qtr, at 4.6%, from the 1st qtr's 4.5%. Furthermore, q-o-q seasonally
adjusted growth, of 4.8%, was only modestly higher than the y-o-y growth rate. One needs
to caution, however, that seasonal adjustment for the 2nd qtr has probably inflated most
growth rates and conversely depressed 1st qtr figures. This is because in almost 80% of
years, the Easter long weekend falls into April and accordingly seasonal factors tend to
boost 2nd qtr indicators compared with the 1st qtr. However, in the present year, Easter
fell into March instead of into April. Therefore, with fewer working days than normal in
March this year, but more working days than normal in April, seasonal adjustment based on
historical patterns is likely to have boosted 2nd qtr data artificially at the expense of
data for the 1st qtr in the present year specifically. SIGNS OF A SLIGHT SLOWDOWN IN PRIVATE CONSUMPTION
GROWTH
In the event, growth in private consumption expenditure fell only
marginally, from 6.6% in the 4th qtr of 2004, and 6.4% in the 1st qtr of 2005, to 6.3% in
the 2nd qtr. Q-o-q seasonally adjusted annualised growth in the 2nd qtr in turn was ever
so slightly lower, at 5.9%. In other words, the boom in consumer spending of the past
year, was broadly sustained in the 2nd qtr. Within the overall trend, there was a
sensational acceleration in the growth of demand for durable goods, from an already
exceptionally high 19.2% in the 1st qtr, to 20.8% in the 2nd qtr, on the back of a
seasonally adjusted annualised q-o-q growth, of 26.7%. This was largely attributable to
the boom in car sales, since the detailed report by the Reserve Bank suggests that growth
in sales of other durable goods, such as furniture and household appliances, slowed
somewhat in the 2nd qtr. A slight slowdown in growth was basically in evidence in all the
other sectors of consumer spending, with that of semi-durable goods continuing its gradual
decline from 15.8% in 3rd qtr 2004, to 15.4% in the 4th qtr, 13.9% in the 1st qtr and now
down to 12.8% in the 2nd qtr, with q-o-q seasonally adjusted growth even lower, at 9.0%.
Similarly, there was a modest reduction in growth of non durable goods consumption, from
4.7% in the 1st qtr, to 4.4% in the 2nd qtr, on the back of an even lower 3.3% q-o-q
seasonally adjusted growth rate. Likewise with the consumption of services, growth fell to
2.8% in the 2nd qtr, from 3.1% in the 1st qtr, 3.3% in the 4th qtr of last year and 4.2%
in the 3rd qtr of last year. Given that the ratio of household debt to disposable income
rose close to its all-time high, at 61.8% in the 2nd qtr, it follows that the capacity for
consumers to carry on spending at their erstwhile rapid rate, has been fading. In
particular, with wage settlements having relented down to 6% in the first half of 2005,
from 7.3% in the same period of 2004, but with the rate of increase in the cost of living
having risen from less than 1%, to over 3% over this period, there has been a perceptible
decline in real wage growth. This was bound to exert downward pressure on the growth of
consumer spending in the absence of an astronomical further increase in personal
indebtedness.
GROWTH IN FIXED INVESTMENT
ALSO SLOWS
The marginal slowdown in the growth of private consumption expenditure
in the 2nd qtr was, if anything, even more accentuated in the case of fixed investment.
Y-o-y growth of fixed investment, which had begun declining from 9.8% in 3rd qtr 2004, to
9.6% in the 4th qtr and 9.2% in the 1st qtr of 2005, fell more steeply to 8.1% in the 2nd
qtr. Q-o-q seasonally adjusted growth was down to just 5.7%. There were slight increases
in the pace of growth in non-residential building and civil engineering (construction) and
in investment in electricity. One assumes that higher investment in these segments was
associated with government's infrastructural investment programme, especially in the
electricity arena. |
Although the Reserve Bank suggests that
investment by public corporations slowed, the absolute growth in fixed investment seems to
have been much slower in the case of investment by the private sector than the public
sector. Private sector in investment posted annualised growth of just 4% in the 2nd qtr.
In particular, there were sharp declines in the annualised q-o-q growth of investment in
the 2nd qtr in mining (-32.7%), manufacturing (-5.0%) and more generally in investment in
machinery and equipment (1.7%). This suggests that investment in export oriented
activities has continued slowing progressively in the face of an overly strong currency
which renders such activities uncompetitive. There was also a noticeable tailing off in
the exceptionally high growth of residential building, but even so the absolute level of
such growth, at double-digit levels, was still quite high in the 2nd qtr. GROWTH RECEIVED A BOOST FROM HIGHER
INTERNATIONAL COMMODITY PRICES
With growth in both private consumption expenditure and fixed
investment slowing somewhat in the 2nd qtr, superficially it seems strange why overall
economic growth, if anything, picked up slightly in the 2nd qtr in a manner which has
excited the nation. The answer is to be found firstly, in the fact that the rate of
inventory accumulation picked up slightly from R960m in the 1st qtr, to R2.07bn in the 2nd
qtr. Secondly, growth in government consumption accelerated slightly to an annualised
q-o-q growth rate of 5.3%. Most importantly, however, there was a sharp increase in the
growth of real exports, from 8.5% in the 1st qtr, to 10.3% of the 2nd qtr, on the back of
exceptionally strong seasonally adjusted q-o-q growth of 23.9%. According to the Reserve
Bank this was primarily attributable to higher commodity prices resulting from strong
demand for mining products emanating out of China and India. As a consequence, the current
account deficit managed to contract slightly, from 3.8% of GDP in the 1st qtr, to 3.4% of
GDP in the 2nd qtr.
CAPITAL INFLOWS REMAIN VERY
LARGE, BUT CAN THEY BE SUSTAINED INDEFINITELY
Such an expansion in the current account deficit proved even less of a
problem than before in the face of a continuation of large-scale capital inflows. In the
2nd qtr in particular, portfolio investment increased to R22.1bn, from R7.8bn in the 1st
qtr. In addition, direct investment improved from an outflow of - R0.7bn in the 1st qtr,
to an inflow of R3.9bn in the 2nd qtr largely as a result of the "repatriation of the
proceeds from the selling of a foreign subsidiary by a South African retail company",
apparently due to British retailer Grand Universal Stores completing the sale of its
remaining 50% holding in the Lewis Group. The result is that, if one analyses the rate of
capital inflows into the country in the first half of 2005, of R48.0bn, the economy
sustained the exceptional rate of capital inflows experienced in 2004, viz. R96.2bn.
Nevertheless, one continues to remain nervous of a situation at some stage in the future
when higher commodity prices do not come to the rescue of the current account in the
manner in which they've been doing over the past two years.
In conclusion, the unbalanced pattern of economic expansion
witnessed over the past two years, continues. A strong currency is contributing towards
low inflation and interest rates and leading to boom in home building and consumption
expenditure, much of it on imports and much of it on borrowed money. However, the strong
currency is also hurting the productive side of the economy, making it extremely difficult
to export and to compete against imports. Accordingly, job creation in a country beset
with a high unemployment problem, is not benefiting commensurately with the growth being
experienced in the overall economy. At some stage, one cannot help believing that the
large current account deficit will come home to roost in the form of a significant real
depreciation of the currency. In the short term, with ongoing large-scale portfolio
inflows, the economy is being shielded from the damage which such a deficit could bring
about. However, in the longer term it remains one of the downside risks to sustaining a
stable and high pace of growth.
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