Will economic growth continue? Maybe …

‘Without a significant improvement in service delivery and infrastructure we will not see 6% economic growth. Consumer spending alone will not achieve our growth targets.’
Issue date 26 October 2007

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The South African economy grew by 4,5% on a seasonally adjusted year-to-year basis in the second quarter of 2007, the 35th consecutive quarter of growth in the GDP since 1998. The per capita disposable income of households increased in real (inflation-adjusted) terms from R12 722 in 1994 to R16 256 in 2006, and will probably grow by at least 7% from 2006 to 2007. The higher income resulted in a sharp increase in consumer spending, further bolstered by the increase in credit extended to the private sector. Further impetus came from financial institutions that rushed to supply credit to all and sundry before the more restrictive Credit Act came into effect in July. The South African growth experience was not unique. Many emerging economies grew at rates above the world average for 2006 of 5,5%, and the International Monetary Fund predicts global growth of 5,2% in 2007 and 2008. The major threats to continued growth remain the volatile oil price and higher inflation. I t seems global growth will continue during 2007 and 2008. The growth of the SA economy was largely driven by increased demand from the more affluent population. The SA Reserve Bank tried to curb excess demand, increasing the interest rate since April 2006 by three percentage points – an increase of 28% in interest rates. Consumer spending slowed slightly, but it remains positive and will still contribute to economic growth. Changes in retail sales, consumer credit uptake and interest rates are shown in Figure 1. Limitations to growth in SA W hile higher local demand will help sustain economic growth, it is vital that exports grow too. However, the current stronger rand limits exports and makes imports more viable. The latest strikes caused a drop in production that will also have a negative effect on exports. SA’s current account deficit was R112 million for 2006. The trade deficit for the year to end August was R50,1 billion, up 20% on the same period of 2006. We manage to cover the shortfall mainly with portfolio investments and selling SA assets to foreigners, but the Reserve Bank remains concerned. The current tight electricity supply situation is expected to persist till 2012, but a growth rate of over 5% will need an increase in electricity production to match. The government has planned a massive capital development programme running to 2010. While a lot of money will be spent on unproductive soccer stadiums, the development of other infrastructure will also receive some attention. Service delivery is a big problem. In the agricultural sector some government services have broken down completely, and industries find that they are in danger of losing export contracts because of problems in government. The availability of skilled and even semi-skilled labour is another enormous problem. Since 2006 the economy grew at a faster rate than total employment. Skills development through SETAs is not keeping pace with demand, and it is also doubtful whether the education system delivers the skilled people needed to grow the economy. G ood governance and accountability within government will help to achieve the needed growth. The private sector, including primary agriculture, is ready to play its role. Government will have to get its house in order. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions are his own and do not reflect MPO policy. |fw