Fading optimism

EARLIER this year, some prominent economists upgraded their gross domestic product (GDP) growth forecasts to more than 3% for 2010.

Now that the second-quarter figures have been released and there's renewed global gloom, they must be regretting their optimism.

GDP figures showed the economy grew by 3.2% in the second quarter, sharply down from 4.6% in the first quarter. (All figures quoted are quarter-on-quarter, seasonally adjusted and annualised, unless otherwise stated.)

The key issue about these GDP figures is that they were boosted by a series of once-offs – and not just the 2010 FIFA World Cup. One factor is agricultural production, which surged 11.6% in the second quarter from only 3% in the first and negative growth rates last year.

The rise in agricultural output added 0.2 percentage points to GDP growth; without it, GDP growth would have been exactly 3%. Agriculture has a very low weighting in GDP – only 2.1% of the total – but when it grows as rapidly as this, it can make a difference. Trouble is, the agricultural output figures are erratic and one can't count on this level of growth continuing.

Then there is, of course, the World Cup effect. This undoubtedly boosted the wholesale, retail, motor trade and accommodation sector – not just spending on Cup events alone, but also buying of television sets and motor hire companies buying new vehicles.

World Cup once-offs

This sector notched up 5.8% growth and added 0.7 percentage points to GDP growth. The question is how sustainable this growth rate is, once the World Cup effect has fully fallen out of the figures.

That will be a key question for the economy. Unemployment and high indebtedness suggest the consumer will have little appetite to spend; however, the high wage increases being secured by aggressive labour unions put extra money into people's pockets. Already, the last Reserve Bank Quarterly Bulletin showed personal disposable incomes rising rapidly.

The question is whether the unemployment caused by the high wages will offset the extra income earned by those who have jobs. Helping consumer spending as well, of course, is the 5.5 percentage point cut in interest rates.

Though it seems that consumers, having been burnt by the previous upward cycle in interest rates, are preferring to spend cash, if the credit growth numbers are anything to go by.

Another possible once-off factor due to the World Cup is the rapid growth in the transport, storage and communication sector of 4.5%. This translated into a 0.4 percentage point addition to GDP. Standard Bank economist Danelee van Dyk says this high growth probably reflects spending on communications infrastructure in the run-up to the World Cup.

These are the once-offs that, as they reverse, could have a depressing effect on growth in the third quarter. Another question is whether manufacturing (which grew by 6.9%) can continue to lead growth, given the strong rand and an increasingly weakening global backdrop.

The weaker global economy will also be a negative factor for mining exports – more bad news after a disastrous second quarter for mining.

No jobs for 60% of hopefuls

The bottom line is that growth in the second half of the year could slow even further. Economists expect a third-quarter growth rate of "around 3%", and then less than 3% in the fourth quarter. This is also borne out by the leading economic indicator, which fell month-on-month for the second consecutive month in June. The indicator predicts economic activity six months into the future.

But SA doesn't just have a sluggish growth rate. It also has jobless growth. Even growth of 3.2% is nothing to be sniffed at; yet it has failed to generate new jobs. In the second quarter of this year, 61 000 jobs were lost and the unemployment rate rose marginally to 25.3%.

But of more importance is the labour absorption rate, which shows what percentage of the working age population (aged 15 to 64) is absorbed into the employed. This rate is only 40.6%.

This means almost 60% of the working age population doesn't have jobs, which comes to almost 19 million people.

Economic growth, even if it doesn't create jobs, helps these people by generating revenue that government can use for social transfers. There are more people receiving government transfers than have jobs, so it's all the more necessary for the SA economy to grow.

Against this background, the civil servants' strike seems like even more of a tragedy. Labour wants government to spend R5bn more on existing civil servants' wages.

Government could probably find the money, thanks to Finance Minister Pravin Gordhan's uncanny ability to source revenue. But there are limits to what even he can do.

The money would be better spent on creating new jobs in the civil service than giving its existing members a big increase. SA's growth and employment figures show that the civil service strike is a disaster for the SA economy. The optimism that prevailed a few months ago is fast dissipating.

- Fin24.com