Is the South African Government s Growth Target of 6% by 2014 in Jeopardy?

Size: px

Start display at page:

Download "Is the South African Government s Growth Target of 6% by 2014 in Jeopardy?"

Ezra Reeves
5 years ago
Views:

1 12 June 2008 Park Hyatt Johannesburg, South Africa Is the South African Government s Growth Target of 6% by 2014 in Jeopardy? Ronèl Oberholzer Senior Economist Global Insight Southern Africa

2 Presentation Outline Historic perspective AsgiSA Current situation Growth targets scrutinised Future developments Conclusion

3 Trend Growth Up: Characterised by Real Sector Developments 15 Trend growth unpacked: Real sector cycles q-o-q annualised % growth Q1 GDP average growth: : 3.2% 1972Q3 1974Q1 1975Q3 1977Q1 1978Q3 1980Q1 1981Q3 GDP average growth: : 1.8% 1983Q1 1984Q3 1986Q1 1987Q3 1989Q1 1990Q3 GDP average growth: : 1.8% : 2.6% 1992Q1 1993Q3 1995Q1 1996Q3 1998Q1 1999Q3 GDP average growth: : 4.1% Real GDP Real private consumption spending Real investment spending 2001Q1 2002Q3 2004Q1 2005Q3 2007Q1

4 On the Back of Financial Market Developments 30 Trend growth unpacked: Financial market cycles Q1 1972Q3 1974Q1 1975Q3 1977Q1 1978Q3 1980Q1 1981Q3 1983Q1 1984Q3 1986Q1 1987Q3 1989Q1 1990Q3 1992Q1 1993Q3 1995Q1 1996Q3 1998Q1 1999Q3 2001Q1 2002Q3 2004Q1 2005Q3 2007Q q-o-q annualised % growth Real GDP Rand/US$ Policy interest rate

5 That Lead to Developments in the External Sector 15 Trend growth unpacked: one more real sector sub cycle Q1 1972Q3 1974Q1 1975Q3 1977Q1 1978Q3 1980Q1 1981Q3 1983Q1 1984Q3 1986Q1 1987Q3 1989Q1 1990Q3 1992Q1 1993Q3 1995Q1 1996Q3 1998Q1 1999Q3 2001Q1 2002Q3 2004Q1 2005Q3 2007Q1 q-o-q annualised % growth Real GDP Real exports Real imports

6 Which Changed the Structure of the Economy % 8.5% 23.7% 24.4% 62.8% 67.8% Primary Secondary Tertiary

7 And Created Between Them Imbalances and Risks Growing household debt <77% as share of PDI Low domestic savings Personal savings: negative Current account deficit at 7.3% as share of GDP Dependency on foreign inflows Supply side constraints Inadequate infrastructure (energy, liquid fuels, roads, ports) Raw material shortages Skills deficit

8 AsgiSA was Launched in February 2006 Target: Halving unemployment and poverty by % real GDP growth to % real GDP growth 2010 to 2014 Binding constraints: Deficiencies in governments capacity The volatility of the currency Low levels of investment infrastructure and infrastructure services Shortages of suitably skilled graduates, technicians and artisans Insufficiently competitive industrial services and weak sector strategies Inequality and marginalisation, resulting in many economically marginalised people being unable to contribute to and/or share in the benefits of growth and development (Second Economy)

9 But Hit Some Rocks in the Road: Cyclical Slowdown (Globally) Leading Indicator Mar-00 Jun-00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 y-o-y % growth y-o-y % growth Leading Indicator Real GDP growth (right)

10 Coupled with High Oil and Food Prices Pushing Inflation and Interest Rates Up Inflation and Interest Rate Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 y-o-y % growth Real Repo CPIX Repo Rate

11 Hurting the Consumer Seasonally Adjusted Real Retail Trade Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 % growth Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 3-month annualised % growth y-o-y % growth

12 Hurting the Consumer (Cont.) Vehicle Sales Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 y-o-y % growth Passenger vehicles Commercial vehicles

13 Hurting the Consumer (Cont.) House Prices Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 y-o-y % growth Apr-06 Jul-06 y-o-y % growth Real house prices

14 And Filtering Through to the Supply Side Manufacturing Production Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 % growth Index 3-month annualised % growth y-o-y % growth PMI (right axes)

15 And Filtering Through to the Supply Side (Cont.) Construction Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 y-o-y % growth Total Building plans passed Buildings completed

16 Government s Growth Target Scrutinised: Capital to Tow the Line Growth = Capital + Labour + Productivity Government s Investment-to-GDP target : 25% by 2014 In 2007Q4 this ratio stood at 21%, up from 14.7% in 2002Q1 Fixed capital stock grew at a rate of 4.6% y/y in 2007Q4 compared to 1% in 2002Q1 Given an annual employment and productivity growth of around 2.5%, fixed capital stock will have to show a growth of around 4-5% per annum to achieve and sustain the 6% potential economic growth rate over the forecast period Government has pledged billion rand to general infrastructural spending over next three years Government and parastatal investment spending has elasticity of around With budgeted spending in excess of 25% over the next three years at least 1% per annum will be added to growth Public-sector investment is expected to crowd in private-sector investment Private sector elasticity Needs growth of 10% per year to add another 1% to growth per year

17 Labour Creation Not Sufficient Economic growth has not been labour absorbing Total formal non-farm employees 2007: 8.4 million up (2.2% y/y) from 8.2 million in 2006 Global Insight s macro-econometric model shows employment elasticity with respect to GDP growth at 0.51, meaning that for every 1% increase in economic growth, private-sector employment increases by 0.51% Private sector employment is expected to grow at a steady rate of 2.1% per year over medium term, which translates to between 200,000 to 300, 000 new jobs per year and leads to a gain of around 14% on the unemployment rate by 2014 a far cry from the 50% gain targeted by government Ways to increase employment elasticity: Increase pool of skilled labour Lowering real wage Addressing hiring and firing regulations and costs Revisiting affirmative action policies

18 Productivity Poses a Challenge 4.5 Productivity y-o-y % growth Capital productivity Labour productivity Multifactor productivity

19 Research and Development Promising Challenge: Increase production using the same stock of capital Measures: Research and development National R&D strategy Focus on science, engineering, technology and innovation Target of 1% of GDP by 2008 R&D Tax Incentive Programme

20 Research and Development Promising (Cont.) Gross expenditure on R&D as % of GDP % of GDP Gross expenditure on R&D as % of GDP Gov spending on R&D as % of spending on economic services and infrastucture

21 But Labour Productivity Needs More Attention Analysing Senior Certificate Results Year Increase in candidates y/y % growth Pass rate % of candidates Exemptions % of candidates passed HG math % of candidates passed HG science % of candidates passed source: JET Education Service

22 Global Insight s Forecast y-o-y % growth Real GDE Real GDP Balance on current account (% of GDP) GDP Growth and Current account % Balance on current account (% of GDP) Real GDE Real GDP

23 Growth Unpacked Slowdown in 2008 Resilient household spending reacting to monetary tightening Slowing to 3.6% in 2008 Expected to grow at more sustainable levels of on average 5% over medium term Interest rates nearing peak Upside risks to inflation remain food and energy prices More balanced growth between production and expenditure Fixed Investment growing at double digits Governments growth initiative crowding in private sector investment Future growth opportunities centered in non-residential investment Investment growth keeping imports high Current account deficit above 5.5% level over short to medium term Capital inflows continue to cover large balance of payments deficit Dividend and interest outflows are increasing Subject to risk aversion and foreign investor perceptions

24 Challenges However Remain Electricity Eskom s long-term expansion plans total around billion rand (US $43.0 billion) up until 2012 New generating capacity of 40,000MW is to be added by 2025, estimated to cost around 1 trillion rand (US$133 billion) At least 30% private sector participation Short to medium term issues: Management Reserve margin < 8% Power stations running at capacity leading to unplanned outages Eskom seeking 10% saving from consumers and industrials Co-generation options, mothballed power stations, OCGT New base load expected from 2012 onwards Current account deficit Increasing domestic savings Improving export-performance

25 Conclusion It is possible to achieve some of government s targets Challenges remain Prudent macro policies imperative Stable political backdrop

26 12 June 2008 Park Hyatt Johannesburg, South Africa Thank You! Ronèl Oberholzer Senior Economist Global Insight Southern Africa

18. Real gross domestic product

18. Real gross domestic product 6 Percentage change from quarter to quarter 4 2-2 6 4 2-2 1997 1998 1999 2 21 22 Total Non-agricultural sectors Seasonally adjusted and annualised rates South Africa s real