Global Recovery Drives South African Growth

Surprising once again on the upside, first-quarter 2010 GDP figures have shown manufacturing and mining leading the South African recovery, implying that the growth impetus originates from the global recovery as domestic demand conditions lag.

According to Statistics South Africa, the real seasonally adjusted GDP grew an annualised 4.6% in the first quarter of 2010, compared with growth of 3.2% in the fourth quarter of 2009. (All quarterly data are seasonally adjusted and annualised quarterly growth rates unless otherwise specified.) The main contributors to growth were manufacturing (1.3 percentage points), mining and quarrying (0.8 percentage point), finance (0.5 percentage point), and wholesale and retail trade and government (both contributing 0.4 percentage point). The seasonally adjusted real value added excluding agricultural industries for the first quarter of 2010 increased by 4.4% following an increase of 3.7% during the fourth quarter of 2009. On an annual basis, real GDP grew by 1.4% year-on-year (y/y), up from a contraction of 1.6% y/y in the previous quarter. This is the first positive annual figure since December 2008.

Manufacturing Toeing the Line
The growth in manufacturing made up around 58% of all growth in the economy, although this sector occupies second place to the finance sector in terms of its contribution to overall GDP. Manufacturing grew an annualised 8.4% in the first quarter of 2010, slightly slower than the 10.1% growth achieved in the previous quarter. Growth momentum came from the export orientated sectors. Despite strong growth the sector still shed 33,000 jobs in the first quarter. Future prospects, however, look encouraging as the employment index in the Kagiso/BER purchasing managers' index (PMI) has been on the rise since January 2010 despite a slight drop in the overall PMI as some headwinds face the industry. Recent European Union (EU) growth concerns on the back of sovereign risk fears and increased domestic wage costs, a relatively strong currency, and slow domestic demand recovery can hamper future growth prospects.

Mining Boosted by Commodity Recovery
Around 37% of all growth in the economy originated from the mining and quarrying sector. This sector grew a stellar 15.4%, following growth of 4.6% in the previous quarter. A nearly 12% increase in platinum prices in the first quarter of 2010 compared with the fourth quarter of 2009 boosted production. Commodity prices are nevertheless expected to stabilise around current levels as global growth concerns and instability increases on the back of Eurozone uncertainties. The relative strength of the currency and rising wage costs are also bound to hamper a sustained recovery in these sectors.

Financial Sector Catches Up
Financial services, making up 21.2% of overall GDP, grew an annualised 2.5% following the previous quarter's upwardly revised 2.1%. A gradual increase in economic activity is underpinning growth in this sector.

Demand Side Shows Signs of Life
Matching expectations, the wholesale and retail sector showed the first significant contribution to growth in more than four years. This sector makes up around 11.8% of the overall economy and registered annualised growth of 3.3% after seven quarters of contraction. Growth from this source is expected to be slow as the consumer is still deleveraging, but a significantly looser monetary stance as the inflation outlook improves, improving wealth levels, and rising confidence levels in the economy will slowly entice the consumer to increase his spending on non-durables and to consider replacing aging durables. The lagged effect of job losses will place a damper on disposable income, but high wage settlements will at least over the short term boost spending. Retail sales are thus expected to improve steadily over the year while also receiving a boost from spending associated with the FIFA World Cup football (soccer) tournament in June.

Construction Lags the Cycle
The construction sector continued on the slowing trend to post a 2.1% annualised growth following 3.6% growth in the fourth quarter of 2009. This trend is likely to continue as private investment is only expected to show a slow recovery towards year-end.

Other Sectors to Take Cue from Larger Contributors
The transport, electricity, services, and government sectors all contributed positively to growth and will follow the increase in activity from the larger contributors in the economy.

Outlook and Implications
Despite the fact that quarterly annualised growth surprised on the upside, concern still centres on the economy's ability to sustain this throughout the year. The main growth impetus came from a global demand recovery and although domestic demand has improved somewhat the expectation is that local demand recovery will be slow. Furthermore, global instability and uncertainty originating from the sovereign risk fallout in Europe can impact significantly on the demand for exports from South Africa. The EU accounts for around 35% of South Africa's exports.

Nevertheless, IHS Global Insight expects second-quarter growth to reflect the effect of spending surrounding the World Cup, although the loss of production following from the transport sector's strike is expected to negate some of the positive contribution. The last two quarters are expected to show slower, more sustained quarterly growth rates. Should the current rate of economic expansion continue (i.e., 4.6% over the remaining three quarters of 2010), growth for the calendar year would be 3.4%. We do, however, expect the incremental increase from quarter to quarter to slow in the second half of the year as the base is raised. We now expect growth of 3.1% for 2010.