Kevin O'Grady

Economics Editor

GROWTH in domestic spending slowed considerably in the first quarter, with a slowdown in consumer spending in particular raising questions about the implications for economic growth.

Growth in the main measure of domestic spending - real gross domestic expenditure - slumped to an annualised 1,5% from 4,5% in the fourth quarter of last year, according to the latest Reserve Bank Quarterly Bulletin, released yesterday.

Although the main culprit was a big drop in consumption expenditure by government, thanks to distortion caused by the acquisition of a navy corvette towards the end of last year, the latest figures also show a household spending slowdown.

Growth in real final consumption expenditure by households dropped from an annualised 7% in the fourth quarter of last year to 5,5% in the first quarter.

Since strong consumer demand - and spending - was one of the main drivers behind last year's impressive rate of economic growth, the drop-off raises questions about how it will be sustained.

The bulletin says the figures "seem to suggest that the strongest part of the expansion of household consumption expenditure might have run its course".

While household spending continued to grow briskly, it was only partly financed by growth in disposable income, resulting in households incurring more debt, it said.

"As a result, household debt as a percentage of disposable income increased further from 58% recorded in the fourth quarter of 2004 to 60% in the first quarter of 2005."

NKC economist Hugo Pienaar said this was a "worrying sign", especially viewed together with the drop in the national savings rate to 13% of gross domestic product (GDP) in the first quarter from 13,5% in the preceding quarter - the lowest quarterly since 1992.

"Government has said it aims to lift the savings rate to 25% of GDP in order to help increase SA's growth potential. Looking at the consumer side, it would therefore in our view be very risky to further cut interest rates,"

Pienaar said.

Although final consumption expenditure by government increased further in the first quarter, it was at a far slower rate (1%) than in the fourth quarter of last year (13%).

However, the bulletin says this does not indicate "an enduring slowdown in government spending", but reflects the acquisition of the corvette, which boosted the figure for the final quarter of last year.

"The ratio of final consumption expenditure by general government to GDP decreased slightly from 20% in the fourth quarter of 2004 to 19.5% in the first quarter of 2005," the bulletin says.

The answer to questions about the sustainability of economic growth in the face of a slowdown in consumer spending might be contained in encouraging signs of an increase in investment spending.

Growth in gross fixed capital formation - the main measure of investment spending - accelerated from 9% in the fourth quarter of last year to 10% in the first quarter.

The bulletin says this "can mainly be attributed to a strong increase in real capital outlays by public corporations, which was further supported by continued growth in real gross fixed-capital formation by the private sector".

Public corporations stepped up spending on electricity and transport infrastructure. In the electricity sector, real capital outlays were increased on new infrastructure and on the activation of mothballed power stations to increase capacity, the bulletin says.

The purchase of three aircraft by South African Airways further boosted real gross fixed-capital formation by public corporations.