Tepid Growth Ahead

BMI View: We forecast tepid economic growth for South Africa over the medium term, forecasting that real GDP will expand by 2.8% in 2013 and 3.3% in 2014. Although private consumption should remain relatively robust, private investment is likely to suffer due to elevated political risk.

The latest data from the South African Reserve Bank (SARB) and Statistics South Africa reinforce our view of sluggish growth stemming from the adverse external environment and elevated domestic political risk. In Q412, the economy as a whole grew by 2.1% quarter-on-quarter on a seasonally adjusted and annualised basis (q-o-q SAAR), bringing full-year 2012 growth to 2.5% (for comparison, growth stood at 3.5% in 2011). The breakdown of GDP by expenditure for Q412 revealed that household spending continued to play an important role in propping up growth, albeit increasing by a lacklustre 2.4% q-o-q SAAR in Q412. Gross fixed capital formation was also a key pillar of support, growing by 4.3% but, as outlined below, this trend is unlikely to continue.

Real GDP Growth, % chg q-o-q, SAAR
Household Expenditure Government Expenditure Gross Fixed Capital Formation Exports Imports Total GDP
Source: South African Reserve Bank; BMI
Q111 6.3 9.3 5.8 7.3 7.0 4.8
Q211 3.1 -0.5 5.2 6.1 6.7 1.9
Q311 3.2 4.8 6.8 8.0 18.5 1.9
Q411 4.4 7.8 7.3 4.4 11.0 3.3
Q112 4.0 1.9 4.6 -3.0 4.8 2.5
Q212 3.2 3.7 5.4 -6.1 -0.5 3.4
Q312 2.7 8.3 5.6 1.6 12.0 1.2
Q412 2.4 -0.7 4.3 -4.3 -12.4 2.1

Given BMI's prediction of stagnation in the eurozone and a slowdown in China in the second half of 2013, South Africa looks set to continue to suffer from a weak global growth environment and potentially high investor risk aversion amid frequent industrial unrest. Taking into account BMI 's view for real GDP growth in the US of just 2.1% in 2013, a slight contraction of 0.1% in the eurozone and a marked cooling of gross fixed capital formation in China, we forecast that the South African economy will post real GDP growth of just 2.8%.

Edging Along, Slowly
Source: South African Reserve Bank; BMI

We maintain our core view that economic growth will be driven by the demand side (ie, wholesale and retail trade, financial and personal services) while the supply side (especially mining) will continue to remain weak. Breaking GDP down by expenditure, we see private consumption adding 2.1 percentage points (pp) to headline growth in 2013; government consumption contributing 0.7pp; exports adding 0.7pp; gross fixed capital formation adding 0.4pp; and imports subtracting 1.2pp.

Expenditure Breakdown

Private Consumption Outlook: We remain fairly positive on private consumption, forecasting real growth of 3.2% in 2013, following growth of 3.5% in 2012. In our view two factors bode well for consumer spending: high nominal wage growth and the low interest rate environment which should keep a lid on debt servicing costs. Regarding the latter point, we expect the South African Reserve Bank to keep the repo rate steady at 5.00% over the coming 12 months. Although the weak growth environment may prompt calls for a rate cut, inflation is heading higher and risks are firmly to the upside given firm maize prices and the relative weakness of the rand (the latest consumer price inflation prints are 5.9% y-o-y in February 2013 and 5.4% in January). Amid this stagflationary scenario, the Monetary Policy Committee will likely choose to maintain the status quo.

Certainly, the latest data on retail sales and credit extended to private households suggest that the consumer remains in decent shape in spite of indebtedness. Retail sales grew by 1.9% y-o-y in January 2013, which is not stellar but nevertheless still positive. Meanwhile, credit extended to private households grew by a robust 9.9% y-o-y. That said, we expect a generally weaker consumer sector in 2013 compared with 2012, given that rising inflation will likely eat into people's purchasing power.

Consumer Sector Holding Up
South Africa - Retail Sales & Credit To Private Households, % y-o-y 3mma

Government Spending Outlook: As regards government spending, we hold a relatively upbeat view, forecasting real growth of 3.5% in 2013. The Treasury is proactively nurturing the economic recovery, withdrawing fiscal stimulus gradually and tolerating a fiscal deficit over the medium term. The budget presented by the National Treasury in February 2013 illustrates this: the finance ministry intends to run fiscal deficits equaling 4.6% of GDP in fiscal year 2013/14 and 3.9% of GDP in 2014/15, in line with its 'gradual fiscal consolidation' policy. The public sector is proving a key driver of job creation in the current climate, helping to boost consumer spending and keep unemployment under control - although joblessness remains high, recorded at 24.9% in Q412.

Investment Outlook: The outlook for investment is less positive: we are forecasting real growth of just 2.0% in 2013 following 5.7% in 2012. Our view is predicated on the likelihood of global risk appetite remaining weak amid a 'muddle-through' in the eurozone and a slowdown in China in the second half of the year. South Africa's manufacturing sector is particularly vulnerable in this regard, given its reliance on external demand - although the ongoing weakness of the rand will likely provide a timely boost to competitiveness. We have also factored in tainted foreign investor perceptions following the Marikana Massacre and subsequent bouts of industrial unrest. Certainly, the Credit Default Swap market suggests that general investor sentiment towards South Africa has deteriorated in recent months. Furthermore, the latest data on business confidence from the South African Chamber of Commerce and Industry indicate that domestic investment will likely cool: the business confidence index stood at 93.0 in February 2013 (based to 2010 = 100) and remained depressed compared with pre-global financial crisis levels.

Lacking Confidence
South Africa - Business Confidence Index, 2010 = 100

Net Exports Outlook: We see the overall impact of net exports being negative: exports will likely see weak growth at best, but we also expect imports to rise, having a deleterious impact on headline real GDP growth.

Looking first at exports of goods and services, we are forecasting growth of 3.0% in 2013. Focusing on one of South Africa's key exports, BMI's Mining analysts are forecasting annual growth in gold output to average 1.4% over the coming five years in spite of the potential for industrial unrest, rising to 6.0m ounces by 2017 from 5.7mn ounces in 2013. Meanwhile for coal - which accounts for the majority of the mining sector's value - our mining analysts forecast a swifter increase in output, with production reaching 284mn tones by 2017, marking average annual growth of 2.4%. This is particularly important as it comes at a time of tight global coal supplies. Iron ore is also notable: the sector is set for significant expansion over the long term, driven primarily by Kumba Iron Ore (majority-owned by Anglo American). For this metal, we expect output to reach 68mnt in 2017, from current levels of around 59mnt. However, given aggressive expansion plans in the west of the continent, it is likely that South Africa will be usurped as Africa's largest iron ore producer.

Turning to imports of goods and services, we are forecasting real growth of 4.0% in 2013, which would be a notable slowdown from the 6.3% growth seen in 2012. In our view, the weakness of the rand will keep import costs elevated, weighing on demand somewhat. Furthermore, the aforementioned slowdown in the growth of investment spending will also likely keep a lid on import growth.

2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f
Notes: e BMI estimates. f BMI forecasts. Sources: 1 South African Reserve Bank/BMI calculations; 2 World Bank/UN/BMI; 3 Statistics South Africa.
Nominal GDP, ZARbn 1 2,262.5 2,398.2 2,661.4 2,964.3 3,163.6 3,444.9 3,751.3 4,077.2 4,433.8 4,822.1
Nominal GDP, US$bn 1 273.5 284.9 363.6 408.1 385.5 383.3 392.9 422.8 455.2 490.2
Real GDP growth, % change y-o-y 1 3.6 -1.5 3.1 3.5 2.5 2.8 3.3 3.5 3.6 3.6
GDP per capita, US$ 1 5,545 5,726 7,252 8,088 e 7,597 7,519 7,673 8,221 8,813 9,448
Population, mn 2 49.3 49.8 50.1 50.5 e 50.7 51.0 51.2 51.4 51.7 51.9
Unemployment, % of labour force, eop 3 21.9 24.3 24.0 23.9 24.9 24.0 23.3 22.6 21.9 21.2
This article is tagged to:
Sector: Country Risk
Geography: South Africa, South Africa

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