South Africa: Economy on the rise

South Africa’s economy is regaining momentum after a challenging few years that saw the country fall into recession in 2009 before slowly working its way back towards steady growth, though some underlying weaknesses will need to be addressed if expansion is to continue.

After a run of good news, including increased retail spending, the government’s projected 3.4% expansion of GDP may be due for a revision.

Figures issued by Statistics South Africa on June 15 showed a far-better-than-forecast increase in retail sales, which posted a 9.8% year-on-year rise in April. This surge in consumer spending has been helped in no small way by the Reserve Bank maintaining interest rates at just 5.5%, a 30-year low that has been in place since late 2010.

On May 31, following the release of the first-quarter 2011 GDP figures, Finance Minister Pravin Gordhan said the results were extremely encouraging.

“If it carries on like that then we’ll be way above the 3.4% that we talked about earlier on,” Gordhan said. “Apart from agriculture, most of the sectors have shown very positive growth and that’s a good sign for the rest of the year.”

That view is reinforced by statements from the Reserve Bank. In its annual report for 2010-11, released on June 14, the central bank said there were indications that the still fragile recovery process was gaining strength and becoming more self-sustained.

However, though cautiously upbeat, the Reserve warned that rising international commodity prices could fuel domestic inflationary pressures. At least to some degree that appears to be the case, with inflation edging up from the five-year low of 3.2% as of September, to a year-on-year figure of 4.2% at the end of April, the most recent data available, with oil imports and rising food costs the main contributors.

Of greater concern is that, despite the solid growth, the economy is still shedding jobs, with a further 14,000 workers being added to the unemployment rolls in the first quarter. This saw South Africa’s jobless rate hit 25%, one of the highest in the developed world. While the economy is growing apace, it has yet to translate that expansion into job creation, a failing that could cost the country dear in the future.

The government is trying to reduce unemployment, announcing a programme of grants, incentives and tax breaks that are aimed to create 5m new positions by 2020. The state is also increasing its own hirings, having added 133,000 staff to the ranks of the public sector in the year ending March 31.

It is also planning to institute a policy of buying local, with the Ministry of Trade and Industry currently drafting regulations that would set aside certain sectors for the procurement of locally produced goods only. These regulations, due to come into effect in December, should prove popular with the chosen industries and suppliers, though they may get less of a warm welcome from importers and overseas manufacturers.

While unemployment is a major concern, and one that comes into any discussion on the economy, there are a number of other problems that the government and the private sector must address before they can achieve the goal of creating 5m new jobs. Many of these obstacles were set out clearly in a report issued by the National Planning Commission (NPC), headed by the former finance minister, Trevor Manuel.

Established last year with the mandate to draft a long-term social and economic development plan for the South Africa Vision 2030, the NPC initial overview of the issues at hand said that the economy was failing to create jobs for those seeking employment, and that the high levels of poverty and inequality were a direct result of the fact that too few people were in the workforce.

“The reasons are complex and multi-dimensional,” the report said. “They are linked to our history, path dependency, education, spatial settlement patterns, savings and investment, labour market structure, natural endowments, geography, and levels of infrastructure investment and maintenance. These issues are complex and inter-related.”

While the report has been criticised as being “gloomy” and downbeat, its remit was not to put a positive spin on the existing situation but to bring to the fore issues that need to be addressed and structural weaknesses in the economy that need to be overcome.

Now, having identified what needs to be fixed, it is up to the NPC, the government and the private sector to identify the “how” and then move directly to implementing the fix itself. With the economy now firmly out of recession, having posted growth for three straight quarters, and a degree of confidence returning, that task may be a bit easier.

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