South African Economy

Recent trends and prospects

Recent economic trends:

Economic growth has gained further momentum

8 6
4
% Change (q-o-q)

Gross Domestic Product (GDP)

Economic growth in South Africa gained further momentum in the opening three months of 2010, with real GDP growth measuring 4.6% on a quarter-on-quarter (q-o-q) basis. However, notwithstanding this positive growth trend, real GDP growth only measured 1.6% when compared to Q1 of 2009. The improved performance in Q1 of 2010 was underpinned by strong growth in the manufacturing sector (8.4% q-o-q), although still highly concentrated among a few sub-sectors, by solid growth in the mining sector (15.4%), as well as by improved activity in the trade (3.3%) and transport (2.4%) sectors. The construction sector continued to report positive growth, albeit at a substantially lower rate than in preceding quarters as lower fixed investment has weighed quite heavily on the level of building and construction activity.

2 0 -2 -4 -6 -8
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2005 | 2006 | 2007 | 2008 | 2009 |
Source: SARB

Recent economic trends: A mixed performance at the sectoral level

The first quarter of 2010 witnessed a mixed performance at the sectoral level, with the mining and manufacturing sectors posting the strongest rebounds, whilst growth moderated in the construction sector.
Real GDP quarterly growth by main economic sector
Total GDP
Other services (6.5)

2010 Q1 2009 Q4 2009 Q3 2009 Q2

Government (15.3) Finance (23.7)

Transport (10.1)

Trade (13.2)
Construction (3.6)

Electricity (2.2) Manufacturing (17) Mining (6) Agriculture (2.3)

-20
Source: Stats SA

-15

-10

-5

10

15

20

% Change (q-o-q) seasonally adjusted at an annualised rate

Figures in brackets in the above graph refer to the sectors percentage share of total GDP at basic prices in Q1 of 2010 (constant 2005 prices).

Recent economic trends: Manufacturing sector showing gradual signs of improvement

15 10 5
% Change (y-o-y)

Manufacturing GDP and Volume of production

The manufacturing sector is showing signs of recovery. Relatively solid growth performances have been reported since Q3 of 2009 (when measured on a q-o-q basis), albeit from rather low bases. Nonetheless, compared to a year earlier, growth in manufacturing GDP was negative throughout 2009, with the sectors output contracting by 10.7% for the year as a whole. Subsequently, it posted 3.1% growth (year-onyear) in Q1 of 2010. However, the sectors recovery remains concentrated in a few of its sub-sectors such as the automotive industry, basic iron and steel, as well as the chemicals sub-sector, and also off very low bases.

-5 -10 -15
Volume of production (monthly)

-20
Manufacturing GDP (quarterly)

-25
1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 | 2005
Source: Stats SA

The manufacturing sectors growth momentum is likely to ease in coming months as indicated by a decline in the purchasing managers index (PMI) and a moderation in confidence levels.

2006

2007

2008

2009

Recent economic trends: Mining sector has benefited from stronger global demand

50 40

Mining production by sub-sector

2008 2009 2010 Q1

The mining sector has experienced a sturdy recovery, albeit limited to a number of its subsectors, following contractions in 2008 and 2009 as the worlds most severe crisis in 70 years took its toll on global demand. External demand has been the key driver behind the turnaround in some of the segments of the mining sector. Globally, crude steel production increased by 32% over the period January to April 2010, when compared to the same period in 2009. Hence the solid performance of the local iron ore, manganese and nickel segments since the beginning of 2010. The platinum group metals (PGMs) sub-sector has benefitted from stronger global and domestic demand due to the revival of the automotive industry. Gold production continued on a declining trend, with South Africa having dropped to 4th place in the global rankings.

77.6%

65.8%
61.4%

30
% Change (y-o-y)

20 10 0 -10 -20 -30 -40

Total mining
Source: Stats SA

Gold

Iron ore

Chrome

Copper Manganese

PGM

Nickel

Other metallic minerals

Coal

Building Other nonmaterials metallic minerals

Recent economic trends: Retail sector still under strain

Retail trade sales

20

Retail trade sales declined by 3.6% in real terms in 2009, although the rate of contraction moderated towards the latter part of the year and growth turned positive more recently. Spending on items such as hardware, paint and glass dropped sharply by 18.2% in 2009, as consumers cut back on home refurbishments, whilst the residential property market remained depressed. Consumer expenditure on the above mentioned items contracted further in the opening months of 2010, whilst spending on furniture and appliances, pharmaceutical products, as well as textiles, clothing, footwear and leather products gained momentum. In April 2010, retail trade reported relatively strong growth of 3.2% on an annual basis, following more than one year of substantial contractions or weak growth figures.

15

% Change (y-o-y)

10

-5

-10
1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 | 2005
Source: Stats SA

2006

2007

2008

2009

Recent economic trends: Household debt remains high

90

Household debt and the debt-service ratio

Household debt ratio (Lhs)

16

A revival of consumer spending, both locally and abroad, is of paramount importance to support the economic recovery on a sustainable basis. Domestically, the outlook for consumer spending is perhaps less than satisfactory since households remain highly indebted, with the debt-to-disposable income ratio still at all-time highs. However, demand for new credit remained subdued over the past year and the sharp drop in interest rates lead to a significant decline in the ratio of debt-servicing costs to the disposable income of households. Going forward, consumers will be more inclined to continue deleveraging rather taking on new debt. Thus, household spending is expected to remain rather subdued in 2010.

Debt to disposable income ratio (%)

80

Debt-service ratio (Rhs)

14

60

10

50
Long-term average Debt-service ratio (%)

40

30

20
1985 1986 1987 1988 1989 1990 1991 1992 2002 2003 2004 2005 2006 2007 2008 2009 2010
1980 1981 1982 1983 1984 1993 1994 1995 1996 1997 1998 1999 2000 2001

Source: SARB, IDC calculations

Debt-service ratio (%)

70

12

Recent economic trends: Continued employment losses, with a few sectoral exceptions

Number of job losses/gains

150
Total number of job losses in 2009 = 870 000.

Although 89 000 new jobs were created in Q4 of 2009, the economy lost 870 000 jobs in its formal and informal segments last year. Moreover, a further 171 000 people lost their jobs between December 2009 and March 2010. Most of these employment losses were reported in the financial services sector (126 000 job losses), construction (64 000), trade (48 000) and manufacturing (33 000). All other main sectors of the economy managed to create additional employment in Q1 of 2010, although employment levels in the mining sector remained unchanged relative to those reported in the final quarter of 2009. South Africas unemployment rate rose to 25.2% by March 2010, from 24.3% in Q4 of 2009, representing more than 4.3 million unemployed people.

100

In Q1 of 2010 a further 171 000 job losses.

50 0
Number ('000)

-50 -100 -150 -200

-250

-300 -350

2009

Q1 2010

Agriculture
Source: Stats SA

Mining

Manufacturing

Electri- Construccity tion

Trade

Transport Finance

Govt. & Com. services

Households

Recent economic trends: Business confidence higher, but moderating

70 60 50 40
Index

Business confidence in the South African economy

After having recovered considerably in the preceding quarter, business confidence fell across all sectors surveyed in Q2 of 2010. According to respondents to the BER survey, weaker demand, both globally and domestically, has underpinned this decline. Concerns over the future pace of the global economic recovery have re-surfaced due to rising fears of a debt crisis in the Eurozone and the impact of associated fiscal austerity. Nonetheless, new vehicle dealers (motor trade) in particular have reported sharply higher confidence levels more recently. The building sector is still taking strain as the residential property market remains quite subdued. Although confidence levels in manufacturing have improved, these are still at fairly low levels. Moreover, the improvement is not yet broad-based, as it is highly concentrated in the transport and base metals sub-sectors.

30 20 10 0
Retail trade Wholesale trade
Q1 2009

Motor trade
Q3 2009

Building contractors
Q4 2009

Manufacturing
Q1 2010 Q2 2010

Total BCI

Source: BER

Q2 2009

Recent economic trends: Consumer prices trending downward

18 16 14
% Change (y-o-y)
Goods Services

Consumer price inflation

CPI : Targeted inflation

12 10 8 6 4 2
Targeted inflation measure: CPIX until Dec '08, Headline inflation since Jan '09

0
1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 | 2005 | 2006 | 2007 | 2008 | 2009 |

Inflationary pressures continued abating towards the end of 2009 and in the opening months of 2010, underpinned by weak domestic demand and by favourable inflation trends globally. Moreover, consumer inflation dipped below the 6% upper-band of the Reserve Banks target range in recent months. It measured 5.7% in February 2010 and declined to 4.6% by May, with expectations of a further moderation in coming months. A deceleration in consumer goods prices contributed to the downward trend in overall consumer inflation, whilst services inflation, which captures largely administered prices, is still rising at a pace that exceeds the target ceiling. The global crude oil price has fallen from an average of USD85 per barrel in April to current levels of around USD75. This trend, along with a firmer currency, has helped to contain inflationary pressures on the producer and consumer fronts.

Source: Stats SA

10

Recent economic trends: Rand strength has been eroding export competitiveness

14

Daily Rand - US dollar exchange rate movement

Rand's near free-fall after 9/11-event

The South African rand strengthened considerably during the course of 2009 and in the opening months of 2010.
The currency appreciated to an average level of R7.64 per US dollar by June 2010, compared to R8.05 in June last year. Against the euro, the rand strengthened by 17.3% over the year to June 2010, averaging R9.34 for the month, compared to a much weaker level of R11.30 a year ago. Factors contributing to the currencys strengthening included lower current account deficits, increased foreign capital inflows instigated by the carry trade in pursuit of higher investment returns, as well as rising commodity prices. The economic recovery domestically and a rather benign inflation outlook also contributed to the rands appreciation.

12

Rand per US dollar

10

The Rand traded at R8.60 to the USD on 11 Sept 2001

12 July 2010 R7.61 / USD

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Bloomberg

11

Economic outlook: Global prospects improved, but downside risks have risen

Economic growth and outlook around the globe

Region / Country
World output Advanced Economies United States Euro area Germany France Italy Spain Japan United Kingdom Emerging and developing economies Sub-Saharan Africa Central and eastern Europe Russia Developing Asia China India Western Hemisphere Brazil Mexico Source: IMF, WEO - July 2010

2008
3.0 0.5 0.4 0.6 1.2 0.1 -1.3 0.9 -1.2 0.5 6.1 5.5 3.1 5.6 7.7 9.6 6.4 4.2 5.1 1.5

2009
-0.6 -3.2 -2.4 -4.1 -4.9 -2.5 -5.0 -3.6 -5.2 -4.9 2.5 2.2 -3.6 -7.9 6.9 9.1 5.7 -1.8 -0.2 -6.5

Projections 2010 2011 2010 2011

The pace of economic recovery globally has been better than initially anticipated, but has varied widely from a regional perspective. GDP growth in advanced economies is expected to be rather sluggish in 2010 and 2011, although it was recently revised upwardly by the International Monetary Fund to 2.6% for 2010 (2.3% previously). However, economic prospects in the advanced world could be constrained by high levels of public debt and the associated fiscal austerity measures, as well as by high rates of unemployment in many countries. Emerging economies are forecast to expand at a fairly fast pace, mainly driven by strong internal demand.

4.6 2.6 3.3 1.0 1.4 1.4 0.9 -0.4 2.4 1.2 6.8 5.0 3.2 4.3 9.2 10.5 9.4 4.8 7.1 4.5

4.3 2.4 2.9 1.3 1.6 1.6 1.1 0.6 1.8 2.1 6.4 5.9 3.4 4.1 8.5 9.6 8.4 4.0 4.2 4.4

China is expected to continue growing rapidly in 2010 on the back of a rebound in exports and stronger domestic demand. A slight moderation in growth is projected for 2011 due to credit control measures aimed at preventing a build-up of excessive capacity.
Downside risks to the global economic recovery not only remain high but have escalated, particularly in advanced economies, with serious concerns over a sovereign debt crisis and real economy implications.

12

Economic outlook: SAs balance of payments to remain under pressure

4
2

Current account of the balance of payments

Forecast

80
40

As the domestic economy recovers, demand for imported products will expand, particularly capital goods for investment purposes and, eventually, consumer items. Import demand for capital goods is anticipated to remain strong due to the massive public sector build programme over the next few years.
BoP: R billion

0 -2
% of GDP

0 -40 -80
-120

-4
-6

A revival in consumer spending could also result in increased demand for imported items such as motor vehicles, as well as a range of other household products. The global economic recovery should see increased demand for South African goods, particularly commodities, whilst certain locally-produced manufactures could also experience increased foreign demand. The local automotive industry is expected to report a substantial improvement in vehicle exports during 2010. According to NAAMSA, vehicle exports are projected to rise at a rapid pace of up to 30% during 2010, provided the global economic recovery remains on track.

-8 -10
-12

-160 -200
-240

Current account balance (R bn) % of GDP

-14 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: SARB, IDC forecasts

-280

13

Economic outlook: SA interest rates and inflation

14

Consumer price inflation and the Repo rate

Repo rate

14

Forecast
12

A rather benign inflation outlook is forecast for the remainder of 2010, with consumer inflation averaging 5.4%, but accelerating towards the latter part of the year. Of concern are the impact of rising administered prices, such as the electricity tariff hikes scheduled for the period 2010 to 2012. Substantial wage settlements well in excess of inflation will also exert upward pressure on prices if not accompanied by productivity improvements. The rather sluggish recovery of the domestic economy should, however, keep demand-pull inflation in check.

12

CPI: Targeted inflation measure

CPI : % Change (y-o-y)

10

10
Repo rate (%)

A rise in global crude oil prices could potentially pose upside risks, but may be cushioned by a relatively strong currency for some time.
Rising concerns over a double-dip recession in parts of the industrialised world and its impact on the SA economy, have raised market expectations of a further repo rate cut.

0
2003Q1 2004Q3 2005Q1 2007Q1 2007Q3 2009Q1 2009Q3 2011Q3 2012Q1 2013Q3 2014Q1
2003Q3 2004Q1 2005Q3 2006Q1 2006Q3 2008Q1 2008Q3 2010Q1 2010Q3 2011Q1 2012Q3 2013Q1 2014Q3

Source: SARB, Stats SA, IDC forecasts

14

Economic outlook: SA GDP growth to remain subdued in 2010, accelerating thereafter

10 8 6
Percentage

Contribution to overall real GDP growth

Forecast

Barring a deterioration of the economic environment internationally, domestic growth is projected at 2.8% in 2010, with a gradual improvement in the growth outlook over the remainder of the forecast period.
Other (e.g. Govt, & Inventories)
Net exports

Consumer spending will show modest growth in 2010 (2%), but should gain momentum over the period 2011 to 2014. Private sector fixed investment activity is expected to remain under pressure in 2010, whilst public sector capex will expand at a fairly robust pace. Exports are forecast to rebound, albeit from a very low base. Key export sectors such as motor vehicles, iron and steel, as well as certain commodities are likely to report relatively stronger export growth. As economic growth gradually accelerates, demand for imports is projected to rise, particularly due to continued investment activity by public corporations.

2 0 -2 -4 -6
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: SARB, IDC forecasts

Fixed investment Consumer spending

Total GDP growth

15

Thank you

Industrial Development Corporation 19 Fredman Drive, Sandown PO Box 784055, Sandton, 2146 South Africa Telephone (011) 269 3000 Facsimile (011) 269 2116 E-mail callcentre@idc.co.za