South Africas Economic Growth Slows To 3,2% In Q2

The 3,2% gross domestic product (GDP) growth figure for the quarter ended June, released by Statistics South Africa (Stats SA) on Tuesday, was lower than expected, particularly given that a significant part of the FIFA World Cup took place on South African soil during the period.

Investment solutions chief economist Chris Hart told Engineering News Online that 3,2% was "disappointing" as economic growth of around 3,6% was anticipated for the second quarter.

"A sturdy boost in the economy was expected over the World Cup period, but one should also account for the ‘holiday effect' that was created by the event, which would imply stronger growth in the services sectors and weaker growth in the country's production sectors."

He pointed out that the disheartening figure placed South Africa slightly above growth seen from developed countries, but below the strong growth experienced in emerging economies.

"One would have expected a stronger recovery by this stage, which may suggest that the authorities might be tempted to put in place additional measures for growth," Hart said.

Investec economist Kgotso Radira agreed, pointing out that the GDP outcome was weak despite the R93-billion that the National Treasury estimated was injected into the economy as a result of the World Cup. "Excluding this, GDP growth would have been much weaker than the 3,2%, showing that conditions remain challenging."

Radira said that given the weak growth in spite of favourable inflation outlook and the rand strength, Investec believed that an interest rate cut of 50 basis points was likely in September.

Nevertheless, speaking at the release of the GDP statistics in Pretoria, Stats SA director-general Dr Rashad Cassim said that sectors related to the World Cup event did show stronger growth rates. "This is evidence of some growth generated by the event, and we will see more of it in the next quarter, because the World Cup was spread over two quarters."

Even though quarter-on-quarter growth dropped from 4,6% in the first three months of the year, year-on-year growth climbed from a negative growth of -2,7% last year, to the 3,2% growth experienced this year.

Cassim told Engineering News Online that the main drivers behind the increase in economic activity during the quarter was the wholesale, retail, motor trade and accommodation industry that all climbed by 0,7 percentage points from the previous quarter.

Further, activity within the manufacturing industry rose by 1,1 percentage points, while government services were up with 0,5 percentage points.

In contrast, the mining and quarrying industry fell by -1,1 percentage points, owing to safety-related stoppages, stockpiling, labour issues and regulatory uncertainties.

Cassim said that if the third and the fourth quarter growth for the year was exactly equal to the first and second quarter of the year, South Africa was looking at a GDP growth of 2,3% for 2010.

Investec expected growth to remain below trend until 2012 as consumers remained overburdened by debt and rising job losses, and even then economists predicted growth rates of around 4%.

South Africa's Finance Minister Pravin Gordhan has recently called for a new sustainable growth path of 7% GDP growth for a period of 20 years, to alleviate unemployment rates, income inequality and serious health, education and infrastructural deficits in the country.

Hart emphasised that if the country was to even come close to such growth rates, it needed to "radically overhaul" its tax structures, industrial and regulatory structures, and seriously relook its labour legislation.

"Investors do not want to be faced with hostile unions and regulations.

"Growth is something you have to buy, which means that a country would need savings and a favourable investment climate to build additional economic capacity. A country could also resort to debt or cash float to acquire the capacity, but these methods are not sustainable over a longer period of time. This means that the burden side of our taxes need to be on the consumption side of the economy and relief is needed on the savings and investment side of the country's economy."

Further, Hart said that South Africa's industrial and sectoral policies also needed to be fundamentally amended. "The country's regulatory environment has increasingly become hostile to business and it is designed in such a way that it seems to protect the vested interests. We have too much regulation that supports the status quo of big businesses and not that of our smaller, entrepreneurial-type businesses.

"Without boosting small business, South Africa will never see the job creation that is needed. This has nothing to do with lowering interest rates or weakening the rand, but the cost of compliance that needs to be dropped. Regulatory authorities should act more like a police service, rather than being a process-orientated service."

Hart also said that the country needed a regime where labour negotiations were related to productivity rather than inflation, which would result in unions becoming allies of growth and company management, rather than enemies.