Economy is losing momentum
Claire BissekerThursday, 14 Jul 2011 FM

After a surprisingly robust first quarter, the SA economy has begun to lose momentum. All indicators point to a slowdown in the second half of the year, though real GDP growth of at least 3,5% for 2011 as a whole seems achievable.

SA’s purchasing managers’ index for manufacturing has declined for three months and is barely in positive territory; the Reuters’ Econometer slipped to 248 index points in June, from 254 in May; and business confidence is low and dropping. In addition, SA’s leading economic index (LEI) is sliding, implying weaker conditions six months hence.

During April, six of the 11 indicators making up the headline LEI tracked lower. A significant drag came from the leading business indicators in the US and Europe, where economies have hit a soft patch, partly because of concerns about sovereign debt .

The marked slowing in economic activity in developed countries is manifest in SA through weaker demand for locally manufactured exports. There is also concern that China’s growth may be slowing.

The timing of the global slowdown is problematic for SA, which has so far relied on the local consumer to lead the recovery. But with an interest rate hiking cycle looming, SA needs the consumption side of the economy to hand over its growth momentum to the production side (manufacturing and investment).

“The consumer has been trying to lead SA’s recovery,” says Absa Capital’s lead SA economist, Gina Schoeman. “Good wage growth and low inflation have allowed for good real income and spending growth, but that doesn’t mean we’re not worried about the consumer.”

Her concern is that consumers have so far failed to pay off debt, leaving them vulnerable once the Reserve Bank raises interest rates.

Though SA’s household debt to income ratio has improved because of rising incomes, this masks the fact that households have added R100bn in debt since December 2008 (see graph).

Consumer vulnerability also seems to be bothering companies, with the latest business confidence surveys showing that the majority of retailers are pessimistic about future business conditions. Consumers’ willingness to spend on durable goods has been declining since the start of the year.

Schoeman expects consumption growth to plateau as real income growth tapers off (with rising inflation) and the interest rate hiking cycle looms.

However, given the relative fragility of the economy, she believes the coming cycle is likely to start later than the consensus (January 2012 as opposed to November 2011) and be limited to 200 basis points in total, allowing consumption to continue to support growth.

Comparing the state of the SA economy now with where it was in 2006, at the start of the previous hiking cycle, shows that GDP growth is now two percentage points lower, credit extension is subdued and the housing market is weak, while both business and consumer confidence imply far greater uncertainty than before. This suggests the coming hiking cycle may be more muted than before.

Fortunately, early signs in the form of rising inventory levels suggest that the production side of the economy and fixed investment should start to contribute more to growth by early 2012.

Reserve Bank chief economist Monde Mnyande agrees there is some evidence that fixed investment and employment are picking up. He thinks GDP growth will come in at around 3,5% for the year against the Reuters consensus of 3,8%. Schoeman is hoping for 3,9%.

“As long as international activity is slow and uneven, we don’t believe we will see really strong or robust activity in SA this year,” says Mnyande. “But I do expect the economy to continue to recover.”