The Reserve Bank has filled in the picture of the SA economy in Q2 2013 adding expenditure, balance of payments accounts as well as money, credit and financial statistics to numbers released earlier by Stats SA for domestic output (GDP). Growth in GDP at a seasonally adjusted rate of 3% in Q2, picked up momentum from the 0.9% rate recorded in Q1 2013. GDP grew by a pedestrian 2.5% in 2012. The modest acceleration in output (GDP) growth in Q2 was attributable almost entirely to a strong recovery in manufacturing output, that grew at an annual equivalent rate 11.5%, having declined the quarter before at a 7.9% p.a. rate. Mining output, by contrast, having grown by a robust 14.8% in Q1, declined at a 5.6% rate in Q2. Agricultural output declined further in Q2 at a 3.7% rate. Growth rates of the tertiary sector measuring activity in services, retail government and financial services, for example, are far more stable than those of manufacturing, mining and agriculture. But growth in service activity has been disappointingly slow of late growing by a mere 2.4% p.a. in Q1 and 2.3% p.a. in Q2 2013, having grown by an only slightly higher rate of 3% in 2012. (see below)
It should be appreciated that the SA economy is dominated by the supply of and demand for services that now accounts for 69% of all value added (the primary sector, mining and agriculture delivers but 11.85% of the economy while and manufacturing has a 12.5% share when measured in current prices. Outcomes in both the trade sector (wholesale and retail and catering activity) with a 16% share of the economy and financial services with a 21.5% share are far more significant for GDP and its growth than trends in manufacturing and mining
It could be said that the currently depressed growth rates are the result of a lack of demand for goods and especially services rather than a lack of potential supply of them. Final demands for goods and services from households firms and the government grew by only 2.5% in Q2 2013, well down from the 4% pace of 2012. Gross Domestic Expenditure that adds changes in inventories to final demands grew at a marginally faster rate of 2.7% in Q2 also well down on the 4.1% increase recorded in 2012. (See below)
Real gross domestic expenditure
Clearly the growth in aggregate spending is slowing down markedly though not all categories of spending were so negatively affected. Household spending on durable goods (cars, appliances etc) grew at a remarkable 11.8% annual rate in Q2 while growth in demand for semi-durables (shoes and clothes) also grew very strongly in Q2 at an 8.2% rate, sustaining the extraordinary growth rates of the past few years. By contrast a decline in the demand for the all important service sectors was recorded in Q2 – again continuing the very weak growth trends of the past few years. (see below)
The explanation for such dramatically divergent trends is in the very different prices being charged. The prices of services(largely influenced by administrative action and regulation) have risen much faster than the prices of clothing and durable goods the services of which are consumed by households. The table below makes this very clear. In the year to date the prices of consumer goods on average rose by 6.3% – the prices of clothing by 3.3% and that described as (durable household content and equipment at an even lower 2.9% while the prices of ‘communication” – telephones and calls rose by a well below average by 1.8%. Clearly prices, relative prices matter for these demand trends.
The weaker rand threatens the relative price trends that have been so favorable for the consumers and retailers of durables and semi -durables. A strong rand is good for consumption generally because it helps makes consumption goods cheaper and lowers the costs of finance, though some forms of consumption benefit more than others. Vice versa a weak rand drives consumption growth lower prices and interest rates higher. Indeed lower levels of consumption and higher levels of production for export and as competition with imports is a necessary part of the adjustment process to a weaker real rand.
The rand weakened because supplies of foreign capital so essential to fund even sub-par 3% growth in SA were made available on less favorable terms. Partly for SA specific reasons- especially the strike action on the mines and partly in recent weeks for global reasons- higher interest rates in the US.
In recent days the SA specifics in the form of a threatened disruption of mining output- so important in the export basket- have seemed less threatening. The threat and reality of higher interest rates in the US has also become less damaging to EM currencies including the ZAR. The recovery in the ZAR especially Vs emerging and commodity currencies reflects some of this. The hope must be that a stronger rand – the result of more favorable global investor sentiment towards SA- will allow lower interest rates that are so badly needed to stimulate domestic demand. Without stronger demands for services, supported as it would have to be by more favorable terms on which foreign capital is made available to SA borrowers, that in turn leads to lower interest rates and more freely available credit, the economy cannot hope to escape any time soon from its current slow growth phase.
All tables and figures included are taken from the SA Reserve Bank Quarterly Bulletin, September 2013