Q4 Growth Figures Show Inventory-Led Recovery in South Africa

Above-expectation fourth-quarter GDP growth figures have revealed an industry- and government-led economic recovery, as inventory accumulation on the back of increased global demand for exports has boosted the recovery in the manufacturing sector.

IHS Global Insight Perspective:
Significance
Around 79% of total growth originated from manufacturing sector and government services growth.
Implications
The recovery is fragile and subject to risks on the global and domestic front.
Outlook
IHS Global Insight expects a slow recovery to gain momentum in the second half of the year as domestic demand improves.

According to Statistics South Africa, the real seasonally adjusted GDP grew at an annualised 3.2% in the fourth quarter of 2009, compared with growth of 0.9% in the third quarter of. (All quarterly data are seasonally adjusted and annualised quarterly growth rates unless otherwise specified). The main contributors to growth came once again from the secondary sector and government. The seasonally adjusted real value added excluding agricultural industries for the third quarter of 2009 increased by 3.8% following an increase of 1.8% during the third quarter of 2009. On an annual basis, real GDP contracted by 1.6% year-on-year (y/y) from a contraction of 2.6% y/y in the previous quarter. For the year as a whole, real GDP growth dropped by 1.8% following the previous year's growth of 3.7%

Inventory- and Export-Led Recovery
Manufacturing, making up around 15% of overall GDP at market prices, grew by 10.1% in the fourth quarter following the previous quarter's growth of 7.6%. This sector contributed 1.5 percentage points to the overall GDP growth of 3.2%. In other words, around a half of all the growth in the economy originated from the manufacturing sector. Most of the industries that boosted manufacturing growth have a heavy export orientation and thus benefitted from the recovery in the global economy, while an inventory accumulation in anticipation of a recovery in local demand boosted supply.

Growth in the construction sector slowed significantly from 6.1% in the third quarter of 2009 to 3.6% in the last quarter as private investment was postponed following the recession and a number of large government projects associated with the 2010 FIFA football (soccer) tournament neared an end. With the government's commitment to infrastructural spending and a gradual recovery in the domestic economy, this sector is still expected to underscore growth. Private investment, however, usually lags the cycle and is only expected to take off towards year-end.

Primary Sector Starting to Benefit from Increased Global Demand
The primary sector contributed only 0.1 percentage point to growth as the agricultural sector contracted by 7.6% in the fourth quarter following the 11.8% contraction in the previous quarter, while mining posted some gains. The mining and quarrying sector grew by 4.6% from a drop of 5.8% previously as improved metal prices and demand, mainly for platinum, boosted production. The relative strength of the currency is bound to hinder a recovery in these sectors as rising global prices are watered down.

The tertiary sector, driven by government spending, contributed 1.4 percentage points to overall growth. Sustained government spending led to growth in the government services sector of 7.0% in the fourth quarter. Financial services, accounting for 21% of overall GDP, surprised on the upside by growing 1.1% following the previous quarter's 1.5% contraction.

The wholesale and retail trade, hotels, and restaurants sector was, besides the agriculture sector, the only sector that showed a negative contribution to growth, and dropped 0.7% following the 1.1% drop in the third quarter. This sector alone makes up around 12% of overall GDP and is an indication that the consumer's financial situation was still under stress, albeit improving.

Outlook and Implications
A closer look at the figures shows that around 79% of all the growth in the economy in the fourth quarter originated from the manufacturing and government sectors. This raises some concerns as the government has indicated that it would restrict spending in the new fiscal year to not more than 2% on a real basis. Furthermore, as indicated, the growth in manufacturing is being boosted by an increased export demand and a rebuilding of inventories. This indicates that a slower-than-expected global upswing could place this sector's growth momentum at risk, while a sustained recovery will hinge on the improvement in domestic demand conditions. IHS Global Insight nevertheless expects consumer demand to gain momentum from the second half of 2010 onwards. The pace of this recovery will, however, be at risk if monetary policy tightening commences late in 2010, as expected.

Our forecast for fourth-quarter 2009 annualised growth was lower at 2.0%. Should the current rate of economic expansion continue (i.e., 3.2% over the four quarters of 2010), growth for the calendar year would be 2.5%, which corresponds with our current forecast. The incremental increase from quarter to quarter will inevitably slow as the base is raised. Annualised growth is thus expected to slow somewhat to 2.5% in the first quarter, following which acceleration can be expected as consumer demand receives a boost from 2010 football spending.