Pre-World Cup Spending Boosts Q1 Domestic Demand in South Africa

Spending on durable and semi-durable goods in anticipation of the 2010 World Cup football tournament has boosted households' real, final consumption expenditure, resulting in a double-digit jump in domestic expenditure in South Africa.

Expenditure Outpaces Production
According to figures released by the South African Reserve Bank (SARB), growth in real gross domestic expenditure jumped to 12.1% in the first quarter of 2010, compared to annualised growth of 4.9% in the fourth quarter of 2009 (all quarterly data are seasonally adjusted and annualised unless otherwise specified). Real, disposable income accelerated to 5.1% in the first quarter of 2010 after growth of 2.3% in the fourth quarter of 2009. Improved wealth levels on the back of rising house prices and equity markets, coupled with lower debt-service costs, and higher employment and wages in the government sector, contributed to this increase. However, the ratio of household debt to disposable income only marginally receded to 78.4% from 79.9% previously.

The main boost to consumer spending came from increased outlays on durable goods (16.8% from 15.2% previously), mainly spending on cars, recreational and entertainment goods, and furniture and household appliances. Likewise, spending on semi-durable goods jumped from a contraction of 0.6% in the fourth quarter of 2009 to 28.4% in the first quarter of 2010. Spending on clothing and footwear, and semi-durable recreational entertainment goods boosted this sub-sector. Spending on non-durables increased by 9.5% following a contraction of 0.7% in the previous quarter, while services spending declined by 4.6% (1.6% previously). The pattern of spending is indicative of pre-World Cup preparations as anecdotal evidence saw a surge in flat-screen television sets and furniture purchases for tourist accommodations. Furthermore, if the low level of credit uptake in the economy is considered, it seems that a portion of the population is relatively cash-flush and thus able to increase spending on semi-durables.

However, IHS Global Insight doubts that these spending patterns will continue beyond the second quarter when another boost to spending is expected as the actual tournament takes place. Confidence levels have already dropped, and retail spending is showing lackluster growth. The FNB/BER consumer confidence index slipped from 15 in the first quarter of 2010 to 14 in the second quarter, with consumers indicating negative sentiment towards buying durable goods, while fewer consumers expect an improvement in their own finances over the next 12 months compared to the first quarter of 2010. Dismal employment figures-showing a loss of 79,000 formal sector jobs in the first quarter of 2010, according to the quarterly employment survey-undermines consumers' expectations of an improvement in their personal finances.

Private Investment Still Contracting
Total real, gross, fixed capital formation turned marginally positive, showing 0.2% growth in the first quarter of 2010 following three quarters of contraction, with no help from private and general government investment. Public corporations still showed substantial 7.4% growth, albeit slowing from the stellar 147.9% growth seen in the first quarter of 2009. This growth was also supported by the World Cup as spending in the transport subsector increased. The rate of decline in private investment slowed as real capital outlays in construction, commerce, transport, and communication picked up, according to the report. Worrying, however, is the continued contraction in general government investment, which came to -8.0% in the first quarter of 2010. This sector is supposed to lead the investment upturn, but a fiscal deficit and expectations of only moderate revenues could be holding government spending back. We foresee a lackluster growth performance for the whole investment sector well into 2011 as World Cup investment comes to an end and the government is slow to award new projects. Currency strength, low growth expectations from the Eurozone (an important manufactured and agricultural trading partner of South Africa), high wage demands, and increased electricity costs will restrict this sector's growth recovery.

According to the reports, the moderation in the pace of inventory depletion in the first quarter of 2010 contributed 6.7 percentage points to the growth in real gross domestic expenditure as de-stocking was mainly evident in the manufacturing sector, while inventories accumulated in the mining, commerce and transport, storage, and communication sectors. A large part of the accumulation of stocks was also geared towards preparation for the World Cup. Further growth support from this sector is likely to wane as demand, both locally and globally, gears back.

Balance of Payments Constraint Raises Head
An unwelcome outcome of spending exceeding production is deterioration in the external finances of the country. The deficit on the current account increased from 2.9% in the fourth quarter of 2009 to 4.6% in the first quarter of 2010. This came on the back of increased spending on imported durables and imports destined for expansion in the energy and transport sector. The value of merchandise imports increased by 3.2% in the first quarter of 2010, while the value of merchandise exports dropped by 1.9% on the back of slower demand, especially from the Eurozone, and currency strength. South Africa's reliance on external finances was highlighted by the increase in the ratio of utilisation of foreign capital as a percentage of GDP from 2.9% in the fourth quarter of 2009 to 4.6% in the first quarter of 2010, while gross domestic savings declined to 16% as a share of GDP from 16.3%. This dependency on foreign capital to finance any domestic demand expansion underscores our argument of not lowering interest rates in the South African economy any further.

Outlook and Implications
At first glance, the figures point to a strong cyclical recovery, but recovery patterns are affected by a temporary boost in spending. When considering the sustainability of the recovery at the hand of several recent high-frequency indicators and confidence levels in the economy, we have to conclude that this pace of recovery cannot be maintained much beyond the second quarter of 2010. Nevertheless, the growth impetus from the first half of the year will be enough to lift growth for 2010 to above 3% year-on-year on average. High debt levels, poor employment prospects, and uncertainty over global growth will lead to smaller gains in growth in the second half of the year, with momentum only accelerating in 2011.