Now that the dust has settled on the GDP data for the second quarter attention shifts to prospects for maintaining the positive growth momentum, albeit marginal over the first half of the year.
The consensus opinion among the 36 economists participating in the monthly survey of forecasts conducted by Unisa’s Bureau of Market Research (BMR) points to continuation of the current growth trend, with an average forecast of 0.3% real GDP growth. Only one of them expects negative growth, while the average of the five most optimistic predictions is above 1%.
Closer scrutiny of the latest GDP data published by Stats SA and trade balance data published by SA Revenue Service provides some clues to the prospects for higher growth during the rest of the year.
Capital formation seems to have decisively turned the corner after the debilitating effects of state capture and Covid-19. Not only did this key demand-side indicator add value to the economy in the quarter under review, but it facilitated future growth through expanding the country’s productive capacity in all sectors.
- At a level of more than R260bn in the second quarter, gross fixed capital formation was 10% higher than in the previous year in real terms, boosted by the return to a positive growth trajectory for fixed investment by the public sector. Though SA’s ratio of capital formation to GDP fell dramatically during the disastrous state-capture era (from 17.6% to 13.8%), it has since stabilised and is now above 15% and rising.
Still on the demand side of the macroeconomic equation, another indicator that lifted its head is the change in inventories. Though it represents a more modest value, the four quarter average for inventory build-up recovered from negative territory during Covid-19 to a positive figure of R23bn in the second quarter this year, a clear sign that manufacturers, wholesalers and retailers are gearing up for higher demand.
Turning to trade data, it is encouraging to note the steep upward trend in imports of machinery and equipment, which provides a partial explanation for the recovery of capital formation. Much of this trend is associated with the exponential growth in renewable energy installations, with rooftop solar photovoltaic capacity in SA having quadrupled in the past year from just above 1,000MW to 4,400MW (excluding government’s renewable energy programme for independent power producers).
No problem
In contrast to some misleading comments about potential balance of payments constraints that have been doing the rounds, the opposite is true. SA is generating almost R500bn in export earnings per quarter. It has been virtually matched by imports in the first half of 2023, resulting in a small surplus on the trade account.
Due mainly to fairly large income payments to the rest of the world, the net result on the current account of the balance of payments has been a modest deficit — less than 3% of GDP. Thanks to the regular occurrence since last year of a sizeable surplus on the financial account however, the net effect on the balance of payments has been close to zero. Clearly, no problem exists regarding foreign exchange flows.
In addition to the simple arithmetic about balance of payments trends, scaremongering among ill-informed commentators over the negative implications of a possible future trade deficit is also flawed in theory. Standard undergraduate economics teaches that a deficit on the current account of the balance of payments is not necessarily a negative economic phenomenon, and vice versa.
Relatively high imports of machinery and equipment (as being experienced this year by SA) are mostly a prerequisite for economic growth in a developing country, even though such a trend may be accompanied by a (usually temporary) trade deficit.
In the first six months of the year imports of machinery and equipment rose dramatically, representing 25% of total imports, its highest share since 2016. The imports of mineral products (which is mainly represented by oil and is involved in a permanent tussle with machinery & equipment for top import trade position), amounted to 20% of total imports, its second-highest level since 2014.
Falling inflation
Both of these categories of imports are crucial to the expansion of productive capacity and economic growth, with the stellar performance of machinery & equipment imports also closely associated with higher investment in renewable energy by small and large businesses alike.
A most encouraging development that promises to eventually boost household consumption expenditure, which remains the mainstay of the expenditure side of GDP, is the sharp fall in the consumer price index (CPI) and the producer price index (PPI). After the normalisation of global sea freight charges, which had increased eightfold during Covid-19 lockdowns, median global inflation is on a clear downward trajectory and SA is no exception.
With inflation virtually at the midpoint of the Reserve Bank’s target range, no reason exists for a continuation of restrictive monetary policy. SA was never exposed to demand side inflation and the relentless increase in the repo rate (matched by the rise in the prime overdraft rate), was unnecessary. Lower interest rates are urgently required to restore consumer confidence, lower the cost of capital and prevent a further erosion of property market activity.
In addition to positive trends in several key macroeconomic indicators and the prospect of lower interest rates before year-end, a most welcome policy development has been closer co-operation between the public and private sectors. As promised during the state of the nation address in 2022, President Cyril Ramaphosa is overseeing a necessary shift towards privatisation.
Terminology is not important — whether government refers to this trend as public-private partnerships, collaboration or joint ventures, the private sector and its inherently superior endowment of technical and management expertise is becoming more involved in repairing, maintaining and expanding the country’s infrastructure.
Progress with this policy approach should herald a new sustained economic growth phase, especially if it is accompanied by a switch to appointments in the public sector that are based primarily on merit.
Dr Botha is economic adviser to the Optimum Investment Group, and Swanepoel CEO of the Inclusive Society Institute.
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