In light of this, Lerato Mothibi and Lorainne Ferreira from the North-West University’s Vanderbijlpark Campus (NWU) – both experts in economy, are posing the question: What factors are driving economic growth and how does the prospect for growth look like over the medium term?
The economy continues to face strong headwinds and is struggling to attain higher growth rates as both domestic and external factors are taking their toll. Leading the charge in terms of domestic issues are the recent cabinet reshuffle and the subsequent fall-out associated with the current volatile political landscape. In terms of the medium term economic outlook the situation is still uncertain since growth is weak and inflation is above the South African Reserve Bank’s (SARB) target. In addition, fiscal policy is under pressure from the risk of a ratings downgrade and due to the continued increase of government debt and higher borrowing rates (in the context of low growth).
However, based on the key economic indicators of the SARB there has been some improvement for five consecutive months, indicating that there is a possibility – slight as it may be, of an improvement in South Africa’s medium term economic outlook. Having said this, the government needs to stick to its consolidation path and improve the effectiveness of spending and investments to ensure that economic growth rebounds in 2017 and continue to grow in 2018.
According to Mothibi and Ferreira the following factors should be closely monitored:
- Gross Domestic Product (GDP)
- Producer Price Index (PPI)
- Trade balance and the current account
- Automotive sales
Gross Domestic Product (GDP)
South Africa’s economy only achieved growth of 0,3 percent in 2016, which proved to be a slump in the growth of 1,3 percent recorded in 2015. GDP growth has been declining since 2014 due to unstable electricity supply, low commodity prices and lessening consumer and business confidence. Slow progress in delivering economic and social services, a decline in manufacturing outputs as well as the prevalence of unemployment and poverty remain a big challenge. Another major concern should be noted within the agricultural sector, where the sector has recorded its eighth consecutive decline, despite the good rainfall that the country has experience during the past few months. The mining industry’s 11,5 percent drop in production during the final quarter of 2016 also impacted the growth sector negatively.
Producer Price Index (PPI)
The PPI measures changes in the prices of locally produced commodities such as final manufactured goods, intermediate manufactured goods, electricity and water, mining, and agriculture, forestry and fishing. During January 2017 the PPI declined to 5,9 percent (which was lower than market expectations) from the 7,1 percent reported in December 2016. Manufactured food, beverages and tobacco products still remained the largest contributors of the PPI outcome. Manufactured food price inflation is expected to moderate further, given deflation in the supply chain. Specifically, producer prices at the agriculture level contracted by 4,8 percent in January 2017. Grain price inflation in particular contracted by 18,4 percent in January 2017 compared to a rise of 79,3 percent in January 2016.
A moderation in food price growth at the producer level bodes well for retail prices at the consumer level. The SARB has however cautioned that retail food price deflation may prove slower than expected with higher oil prices being a limiting factor. In January 2017, the petroleum, chemical, rubber and plastic products component was the second largest contributor to headline PPI of 1,6 percent derived from a 7,4 percent increase. In particular, petrol price inflation accelerated to 8.0 percent from 3.3 percent, while diesel prices rose 13,4 percent from 1,3 percent. The manufacturing PMI survey also signalled stronger input price pressures, dominated by the rise in the Brent crude price. Both PPI and CPI (Consumer Price Index) inflation are expected to moderate in 2017 which would support the argument for interest rates to remain unchanged, provided the Rand does not experience a period of sustained depreciation.
Trade balance and the current account
South Africa’s latest trade balance figures, released on 28 February 2017, show a trade balance deficit of R10,81 billion for January 2017, compared to the R12,41 billion surplus in December 2016. This is attributable to the decline in exports from December 2016 to January 2017. Imports increased by 12,5 percent, mainly due to purchases of machinery, equipment components and electronics. Exports declined at a higher rate of 14 percent, due to a drop in sales of mineral products, transport equipment and vehicles. On a year on year basis, January 2017’s R10,81 billion trade balance deficit is an improvement from the deficit recorded in January 2016 of R19,55 billion due to a 15,8 percent increase in exports, together with a low 2,5 percent increase in imports compared to January 2016.
The slowdown in import growth has largely been due to South Africa’s weak economy, rather than an improvement in import substitution. However, this trend is expected to continue in the medium term, which should help to narrow South Africa’s current account deficit of –R176 billion (4,1 percent of GDP). This expectation is to be driven by rising commodity prices, lower inflationary pressure due to limited drought effects on food prices and an increase in credit stimulating household demand. Unfortunately, the extent of the improvement is likely to be relatively modest given the high propensity to import, which means South Africa remains highly dependent on foreign capital inflows to stop the Rand weakening further.
The new automotive sales statistics for the month of February 2017, released on 28 February by NAAMSA (National Association of Automobile Manufacturers of South Africa), indicates that the positive trend in new vehicle sales has been maintained during this period. Although the consumer driven new car market experienced a decline in sales, light commercial vehicles, as well as medium- and heavy commercial vehicles showed positive growth in sales. The aggregate new vehicle sales for February 2017 was 48 113 units compared to 48 144 units in February 2016. Similarly, the export sales of new vehicles for February 2017 increased by 65 units, compared to February 2016, a gain of 0,2 percent on the 29 323 units exported in February 2016. NAAMSA anticipates that vehicle sales will gain momentum and increase over the medium term.
In addition to NAAMSA’s statement, it is predicted that the easing of the draught conditions, together with the strengthening Rand and projected global growth of around 3,4% could contribute to the sales of new motor vehicles over the medium term. This led NAAMSA to believe that a modest 3,5% increase in the 2017 annual domestic vehicle sales, is possible. The motor vehicle sector plays a very important role in the South African economy. This sector is a key driver of production activities and job creation in many of its supplying industries through the inter-industry linkages with numerous suppliers, and plays a very important role in South Africa’s economic growth.