RESERVE Bank figures released yesterday give a clear indication of what is slowing down economic growth: the international environment.

While SA's total output as measured by gross domestic product (GDP) grew at a sluggish 1,1% in the second quarter (on a seasonally adjusted and annualised basis), gross domestic expenditure by household, company and government increased 5,5% in the second quarter.

The figures clearly show that domestic demand has remained resilient despite the slowdown in global growth. This is positive for growth prospects as the slump in external demand for exports is being compensated by robust domestic activity.

The latest Bank quarterly bulletin, providing a second-quarter review of the economy, shows that household spending was unabated in the second quarter. Consumer spending showed resilient growth last year, despite four interest rate hikes.

Consumer spending on goods and services increased 2,5% in the second quarter (on a seasonally adjusted and annualised rate) the same rate of growth recorded in the previous two quarters.

Spending on durable goods such as furniture and household appliances was strong at an annualised rate of 2,5% last quarter. This could be explained partly by the strength of the rand, which reduced imported prices.

Besides the benefit of cheaper imports, household spending on semidurable and nondurable goods also remained fairly steady, reflecting strong consumer finances and confidence, says the Bank's report.

Consumers found themselves in a much better financial position in the second quarter, following tax cuts, an increase in social grants, higher wages and lower interest rates, according to the report.

However, lower interest rates also fuelled demand for bank credit, with household debt levels rising in the second quarter to 53,5% of disposable income compared to 53% in the first quarter.

"Although an increase in household disposable income partly financed higher consumption expenditure, households also incurred further debt in the second quarter," says the Bank.

Government expenditure also inched up slightly during the quarter, helping support overall domestic expenditure.

Despite a slump in growth in fixed investment to 5,5% in the second quarter from 8% in the previous quarter fixed investment remained at a "lively pace", says the Bank.

Fixed investment growth is watched closely as it is a driver of domestic economic growth. While the mining sector invested in new capital projects, particularly the platinum mining industry, there was a marked slowdown in investment activity in export-related sectors, such as manufacturing.

The sector has taken a knock to production since late last year as the stronger rand added to the global economic slump.

"The slowdown in real fixedcapital outlays by the manufacturing sector was broadly in keeping with the reduced profitability in this sector which was adversely affected by sluggish world demand, the recovery in the exchange rate of the rand and the decline in the utilisation of production capacity," says the report.

But with tentative signs of a recovery in the world economy an improvement in manufacturing performance is on the cards, say economists.

Positive signs from the US and Japan show a pick up in economic growth by the end of the year, which should help drive growth elsewhere in the world.

A recovery in world growth, coupled with steady domestic demand as a result of further easing in monetary policy, supports the outlook for growth next year.

But the uncertain factor in all of this remains the volatile rand, which if it continues to remain at existing levels will impede the growth potential of SA.

Sep 19 2003 07:24:18:000AM Nasreen Seria Business Day 1st Edition