Fourth Quarter 2002 - Moderate Growth
Although economic activity slowed in the second half of 2002, real annual GDP growth
for 2002 was 3.0%, up from 2.8% in 2001. Fourth quarter 2002 y-o-y growth at 3.0% was
weaker than third quarter growth (3.2% revised from 3.3%). Growth in the second quarter
was 3.0% (previously 2.3%) and in the first quarter 2.7% (previously 1.9%). Although firm,
economic activity started to slow in the third quarter and weakened measurably in the
fourth quarter. Real q-o-q (seasonally adjusted and annualised) 2002 growth rates were
2.4% for the fourth quarter, down from 3.0% in the third quarter, 3.8% in the second
quarter (revised upward from 3.1%) and 3.0% in the first quarter (revised upward from
2.2%). Growth in production and expenditure slowed in the fourth quarter in response to
higher interest rates and inflation. Investment growth rates, especially in machinery and
equipment, continued to be remarkably strong throughout the year, providing a basis for
sustainable economic growth in the longer term. Growth in the investment to GDP ratio
increased to 4.9% y-o-y in the fourth quarter 2002 from 2.0% y-o-y in the first quarter.
Growth in this ratio is expected to slow over the next four years. Buoyant economic growth
in 2003 of 3.3% is expected to render a marginal deficit of around 0.5% of GDP on the
current account of the Balance of Payments.
As in 2001, growth in 2002 has been driven by the Manufacturing
(4.0%), Finance, real estate and business services (3.7%) and Transport and communications
(6.1%) sectors. The Agriculture, forestry and fishing sector, which contributes only 3.9%
of GDP, recovered significantly in 2002 (4.0%). The primary sector grew at a rate of about
1.5% in 2002, up from –1.5% in 2001. Although the Agricultural and Mining sectors
recovered and showed healthy growth in the first three quarters, they showed almost no
growth in the fourth quarter. Buoyed by investment in the manufacturing sector and strong
growth in construction spending, the secondary sector posted healthy growth rates in 2001
and 2002 of around 3.5%. Tertiary sector growth weakened marginally from around 3.5% in
2001 to about 3.0% in 2002. First quarter 2002 growth was characterised by optimism and
investor confidence initiated by the Rand's recovery and the flourishing gold price.
Healthy second quarter growth endured despite further weakness in the Rand, increased
inflationary fears and rising interest rates. Similarly, in the third quarter, the rate of
growth was maintained even though interest rates increased by a further percentage point
in September and inflationary fears persisted. Although growth lost momentum in the fourth
quarter, the significant appreciation of the Rand buoyed economic activity and alleviated
inflationary expectations for 2003. Y-o-y GDP growth is expected to strengthen in 2003 as
inflation dissipates and interest rates are lowered. The increasingly stronger gold price,
which rose 25% in 2002 and reached US$357 per ounce in January 2003, continues to attract
investors seeking investment alternatives besides equities and bonds. Lower tax rates on
individuals and increased government investment expenditure will continue to assist growth
and business confidence in 2003.
Growth in 2002 was affected by both global and domestic factors. In the
first half of the year export and domestic demand was robust. In the second half of 2002,
q-o-q growth slowed due to contraction of the primary and secondary sectors and was
characterised by a tighter monetary policy, rising inflation, a strengthening Rand in the
fourth quarter and wavering global economic recovery. A combination of factors appears to
have partially neutralised these constraints to growth. For the year as a whole real
annual Gross Domestic Expenditure (GDE) growth at 4.0% was stronger than in 2001 (2.5%).
Domestic expenditure in 2002 was driven by pre-emptive buying, personal tax cuts,
increased government consumption expenditure from an average of 3.5% in the first three
quarters to 3.7% in the fourth, healthy growth in investment expenditure as well as the
improvement in the financial position of corporations. In addition, the average rise in
nominal wage growth in the first three quarters of 2002 of 9.9% y-o-y, outpaced overall
y-o-y CPI inflation of 8.6%, giving rise to a 1.3% increase in real wages. In the fourth
quarter this situation was reversed and real wage growth declined. Higher international
commodity prices and a lower Rand in 2002 increased competitiveness of South African goods
and services and promoted growth in exports. In 2002 merchandise (non-gold) exports showed
substantial q-o-q growth in the first three quarters as a result of the depreciation of
the Rand. However, real annual y-o-y export growth declined by -1.4% for 2002 as a whole.
This is indicative of the fact that over the past few years, although the declining real
exchange rate has been an important factor underlying the growth of real exports,
improvements in efficiencies as a result of South Africa’s structural economic
transformation have contributed more significantly to export performance. Interestingly,
in the fourth quarter, although a stronger Rand resulted in the Rand price of non-gold
exports dropping by 3% q-o-q from the third to the fourth quarter, the quantity of exports
increased by 12% over this period, so that the real value of exports recovered to levels
reached in the second quarter, having declined substantially in the third quarter. The
surplus on the current account of the balance of payments, as a result of the improvement
in exports, lifted pressure on the exchange rate, which strengthened on a trade weighted
basis in the fourth quarter by around 9.4% q-o-q.
Whereas third quarter growth was fuelled more by domestic expenditure
than export demand, fourth quarter growth experienced a decline in q-o-q GDE growth to
around 5.0% from 8.0% in the third quarter, and growth in the real value of exports
increased from –1.9% in the third quarter to 7.2% in the fourth. Fourth quarter GDE
growth was driven by government consumption expenditure (GCE) and fixed investment.
Evidently, the recovery of the Rand in the early fourth quarter did not have an immediate
impact on South Africa’s competitiveness, and can be expected to retard export growth
in 2003. The decline in GDE growth in the fourth quarter, which was notably less than
expected, can be attributed to continued lower growth in real consumption expenditure by
households, from 3.0% in the third to 2.5% in the fourth quarter, and lower inventory
investment. Expenditure on non-durables, semi-durables and durable goods as well as
services declined. The transformation in the fourth quarter from positive to negative real
wage growth will erode disposable income levels in 2003, which is likely to reduce private
consumption expenditure over the next nine months. Retail inflation rose rapidly in the
fourth quarter, but showed signs of abating in December, falling for the first time to
around 10.3% compared with 10.9% in November. High prices affected fourth-quarter retail
sales which declined by -0.9% on a seasonally adjusted basis. Although growth in
consumption expenditure by households slowed in both the third and fourth quarters of
2002, households’ real annual disposable income grew from 3.0 to 3.5%, helping
consumption expenditure to maintain the 2001 growth rate of 3%. GDE is expected to decline
by –0.8% q-o-q in the first quarter 2003, recovering during the course of the year to
record a growth rate of 3.5%. Growth in fixed investment and private expenditure is
expected to react positively to the lowering of interest rates in the second half of 2003.
Consumer spending is expected to remain subdued in the first quarter of 2003 before
recovering later in the year.
The Survey of Employment and Earnings showed that employment in the
formal non-agricultural sector, after declining over the last three years, grew in the
second and third quarters of 2002 at annualised q-o-q rates of 2.6% and 2.4% respectively.
Employment in the private sector grew by 3.3% and in the public sector by 0.6%. Healthy
increases in employment were recorded in the non-gold mining (16.9%), Transport and
communication (18.6%), and Manufacturing (4.2%) sectors. Indications are that fourth
quarter growth in employment could weaken.
Global economic activity is likely to play a significant role in
domestic economic activity over the next two years, although the reduction of South
Africa's reliance on commodities may cushion domestic growth from declining too sharply in
the face of a global slowdown. A continual fall in equity prices will undoubtedly be a
major hindrance to consumer demand. Doubts persist about the sustainability of a global
economic recovery. High levels of debt incurred during the 1990s have not yet been
neutralised and the positive wealth effect, which encouraged people to borrow and spend,
stands to be replaced by a negative wealth effect. The biggest imbalance in the global
economy, the US trade deficit, is unsustainable.
Although growth projections of between 3.2% and 3.8% over the next
three years fall far short of the 5-6% level needed to have a significantly positive
effect on unemployment alleviation, in comparison to the global picture the domestic
economy has remained resilient. Economic activity has maintained surprising buoyancy under
adverse circumstances. In comparison with other emerging market countries, South Africa's
economic growth has become less volatile. Since the 1950s, the economy has diversified and
exports have become much less dependent on gold mining. Multi-factor productivity, the
combined productivity of land, labour, capital and entrepreneurship, has generally been in
a rising trend since 1992. Structural adjustments in the economy during the last decade
have started to benefit the economy. Private sector investment is now rising and tight
fiscal discipline has allowed government to start increasing expenditure while reducing
borrowing. Non-resource exports generally have grown. Skills development is desperately
needed as well as an attractive investment environment.