Domestic Demand Turns Corner in South Africa

A revival in consumption expenditure has boosted domestic expenditure, as real private consumption expenditure posted positive quarterly growth in the fourth quarter of 2009 after contracting for five consecutive quarters.

IHS Global Insight Perspective

Significance
A revival in consumption expenditure, making up more than 60% of overall GDP, will help economic recovery to gain momentum. Spending on durables was the main contributor to fourth-quarter private consumption.

Implications
An earlier-than-expected consumption spending uptick raises some questions on the sustainability thereof.

Outlook
Fragile and slow economic growth is still expected. Investment lags, and higher consumer spending takes time to manifests in the economy.

Durable Consumption Expenditure Jumps

According to figures released by the South African Reserve Bank, gross domestic expenditure (GDE) jumped by a quarterly seasonally adjusted 5% in the fourth quarter of 2009 after two quarters in negative territory. The recovery came on the back of markedly improved real personal disposable income, which boosted consumption expenditure. Personal income received a lift from stronger wage growth, lower inflation, and employment growth. Real disposable income increased at an annualised rate of 2.7% following a contraction of 1.1% in the third quarter of 2009.

Surprisingly, though, the main contributor to private consumptions expenditure was stellar growth in spending on durables. According to the report, growth in real outlays on durable goods accelerated from 0.7% in the third quarter of 2009 to 15.2% in the fourth quarter, mainly because of spending on new vehicles and durable recreational and entertainment goods. The accommodative monetary stance and attractive promotions on these items alongside likely spending by guesthouse owners and tourism operators in preparation for the FIFA World Cup football (soccer) tournament added to growth in this category. The sustainability of this growth momentum is, however, questionable, as the household sector's debt relative to disposable income edged still higher from 78.4% in the third quarter of 2009 to 79.8% in the fourth quarter even though debt-service costs slowed somewhat.

Real Gross Domestic Expenditure

	Q1 2009	Q2 2009	Q3 2009	Q4 2009
Private Consumption Expenditure
Q/Q Percentage Change at Seasonally Adjusted Annualised Rates	-5.8	-5.2	-1.9	1.4
Y/Y Percentage Change	-2.2	-3.7	-3.8	-2.9
Government expenditure
Q/Q Percentage Change at Seasonally Adjusted Annualised Rates	6.7	0.9	8.1	2.3
Y/Y Percentage Change	4.4	5.2	4.8	4.5
Investment
Q/Q Percentage Change at Seasonally Adjusted Annualised Rates	5.2	-2.5	-6.5	-0.9
Y/Y Percentage Change	7.0	4.3	-0.4	-1.3
Change in inventories (rand bil.)	-6.8	-48.5	-56.9	-38.4
GDE
Q/Q Percentage Change at Seasonally Adjusted Annualised Rates	3.3	-10.8	-1.6	5.0
Y/Y Percentage Change	-0.4	-2.6	-3.1	-1.2
Exports
Q/Q Percentage Change at Seasonally Adjusted Annualised Rates	-56.9	-12.6	11.0	20.0
Y/Y Percentage Change	-14.0	-24.3	-23.3	-15.9
Imports
Q/Q Percentage Change at Seasonally Adjusted Annualised Rates	-28.7	-36.2	-1.0	26.2
Y/Y Percentage Change	-11.3	-22.1	-22.8	-13.2
GDP
Q/Q Percentage Change at Seasonally Adjusted Annualised Rates	-7.4	-2.8	0.9	3.2
Y/Y Percentage Change	-0.4	-2.5	-2.6	-1.6

Investment Deceleration Moderates

The rate of decline in real gross fixed capital formation slowed from a contraction of 6.5% in the third quarter of 2009 to 0.9% in the fourth quarter. Private-sector investment contracted at a slower pace, while capital spending by both public corporations and the general government slowed further when compared with third-quarter figures. This trend is discouraging as investment spending by government and public corporations is relied upon to toe the line until private investment spending picks up. Anecdotal evidence, however, points to service delivery problems in the public sector and long lead times to initialise new projects as World Cup infrastructure spending comes to an end. Headwinds for investment growth include a strong currency impeding competitiveness and increased costs from higher electricity and fuel prices. Real investment growth is thus expected to see only a slow recovery in 2010.

The level of real inventories saw another decline in the fourth quarter, albeit significantly less than in previous quarters. A boost to growth can be expected as restocking has already commenced in the manufacturing sector.

Current-Account Deficit Narrows to 2.8%

The current-account deficit narrowed to 2.8% as a share of GDP in the fourth quarter of 2009, following an improvement to 3.1% in the previous quarter. For the year as a whole the current-account deficit stood at 4.1% as a percentage of GDP, a significant improvement from 7.1% in 2008. The improved current-account position can be attributed to rising commodity prices and improved global demand, which underscored export growth. Stronger domestic demand will boost imports in 2010, as could already be seen from the jump in the volume of merchandise imports by 8% in the fourth quarter of 2009 after contracting marginally in the third quarter. The deficit on the current account was comfortably financed by capital inflows, albeit still mainly highly volatile portfolio flows. The improved current-account position is of course rand, and thus inflation, supportive

Outlook and Implications

The earlier-than-expected jump in consumption expenditure raises some sustainability questions. Personal disposable income was boosted by higher than expected wage growth, which is likely to recede in 2010 on the back of lower inflation expectations. Increased electricity tariffs, albeit on the lower end of expectations, along with higher fuel prices will limit consumers' spending ability. Wealth improvements will be marginal as real house price growth is expected to stay below 5% for 2010. Employment conditions are looking up, but are critically dependant on the continuance of government and public corporation investment spending, as well as a revival in private-sector investment plans. The consumer's ability to take on more debt is limited and is bound to affect growth in specifically durable goods. Nevertheless, encouraging signs in the economy include significantly improved confidence levels, which will support inventory accumulation; a boost to spending from the football (soccer) tournament in June; an improved inflation outlook; and mildly accommodative fiscal and monetary policy. Economic growth is thus still expected to be slow in the first half of 2010, gaining some momentum after that).