ECONOMIC COMMENTARY
Imperative Resolutions Needed
The decline in business confidence in 2012 was not as intense as in 2008 and 2009 when the world experienced its worst recession since the 1930's. However, the tentative economic recovery in Europe and the USA and the slowdown of growth in China and India had repercussions for the South African economy both as major export destinations and in the context of commodity prices. Although the weaker rand helped export earnings, it had and will still have a major impact on the prices of imported investment and household goods and services. Local labour unrest and militancy may also contribute to South Africa being cited as an unreliable supplier which may dent South Africa's standing as a trade partner.
Apart from the business climate being more adverse in 2012, the looming questions over economic policy consistency and predictability remains. The tighter fiscal position of the public sector and serious delivery failures in this sector are causes for concern and have as possible consequences retardation of economic growth and employment creation. The weaker rand is also going to have serious cost implications for the public sector infrastructure program. The high unemployment rate and further increases in social spending will result in the already difficult financing situation of general government deteriorating rapidly in a low economic growth scenario.
The slowdown in global economic performance and the lower domestic growth potential owing to deteriorating public sector services and insufficient economic infrastructure had an adverse effect on South Africa's foreign trade in 2012. The ballooning deficit on the trade account of the balance of payments (BoP) in 2012, and a service account of the BoP that is in constant deficit (average of 4.2% of GDP since 2005), put further pressure on the rand and the financial account of the BoP. South Africa's inability to relatively expand its exports of manufactured products and its dependence on net financial inflows may expose vulnerabilities in the BoP in 2013.
Positive Marginal Moves
The relative price stability and the easing of the monetary policy stance in South Africa have assisted the economy and averted a more serious economic slowdown. Positive deviations were observed in the trade environment where real retail trade on average increased by 4.7% y/y over the first ten months of 2012. Real consumption expenditure by general government on average increased by 4.5% y/y in the first three quarters of 2012 and, apart from the sustainability of financing, these spending trends kept the demand side of the economy buoyant.
Interest rates reached a low level in 2012 with the predominant prime overdraft rate at 8.5% - the lowest in 40 years. However, the present real prime rate at 2.7% was lower towards the middle of 2008. The ten-year bond rate stood at 7.6% towards the end of 2012 - about 1½ percentage point lower than 18 months ago. The lower financing costs (real and nominal) may lead to consumers and government incurring spending levels that will be difficult to sustain over the medium-term given rising debt levels.
The stock market had a positive year with the JSE all-share daily index on average 11.1% higher than a year ago compared to year-on-year increases of 9.5% in 2011 and 19% in 2010. In 2009, the index declined by 18.9%. The average compound rate of increase of the JSE all-share index since 2000 is about 15%.
CHART 1
Inflation remained within the Reserve Bank's target range and although the CPI increased by 0.7 percentage point from the middle of 2012 to year-end, local producer prices increased by 5.2% y/y in November 2012 from 10.1% y/y a year earlier. The prices of imported commodities strangely did not reflect the weakening of the rand and PPI inflation slowed to 5% in November 2012 from 16% a year ago.
There were signs of a possible recovery in certain real activities towards the end of 2012. Exports volumes, real credit extension, new vehicle sales, manufacturing output and building plans passed all improved on levels of a year ago. The promise of improvements in confidence will only realize if the threats of continued labour protest activity, already revealed in the early days of 2013, are dealt with decisively. The first step towards a more conducive business environment in 2013 is for the socio-economic partnership between government, business and labour to urgently realise a commonality of approach in responding to South Africa's current socio-economic crisis.
Prospects and Challenges
Business confidence has declined to an annual average of 94.1 - the lowest level recorded since 2000 when the SACCI BCI stood at 92.7. During 2000 the economy was in the upward phase of the business cycle that started in September 1999 and lasted up to November 2007. Although South Africa is again in an upward phase that began in September 2009, the business climate has deteriorated to such an extent due to tough local and global economic conditions that a special
CHART 2
Apart from global conditions that play an important part in the well-being of the South African economy, local uncertainty and tentative discussions on outdated policy options have also dented investor confidence as is evident from data on foreign fixed investment in South Africa. Although chart 3 only reflects information up to 2011, net direct investment for the first three quarters of 2012 showed signs of declining.
CHART 3
Conclusion
The monetary policy stance is making a positive contribution towards the business climate and may be carrying more than its share of the policy burden. The fiscal position is under pressure as social spending continues to exert unsustainable demands on all levels of government. Real economic activity remains low and it is in this domain where corrective steps and resolutions should indicate that economic performance (real higher economic growth) is the only way out of the haze South Africa finds itself.
This is an extract from the SACCI Business Confidence Index December 2012, January 9 2013
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