Economics South Africa: Macroeconomic perspectives 13 April 2010

Goolam Ballim Johan Botha Shireen Darmalingam Jeremy Stevens Danelee van Dyk

Forecasts

2005 a 2006

a 2007

a 2008

a 2009

a 2010

f 2011

f 2012

f

Growth data

GDP (% y/y) 5.3 5.6 5.5 3.7 -1.8 2.9 3.7 4.1

Final consumption expenditure by households – FCEH (% y/y)

6.1 8.3 5.5 2.4 -3.1 2.4 3.6 4.3

Gross fixed capital formation – GFCF (% y/y)

11.0 12.1 14.2 11.7 2.3 2.0 4.1 4.5

Current account balance (% of GDP) -3.5 -5.3 -7.2 -7.1 -4.0 -3.7 -3.9 -4.1

Inflation data

Headline CPI1 (% y/y) annual average 3.4 4.6 7.1 11.5 7.1 5.2 5.4 5.5

PPI (% y/y) annual average 3.6 7.6 10.9 14.2 0.2 6.6 6.5 7.2

Prime rates

Prime (year end) 10.50 12.50 14.50 15.00 10.50 10.00 11.50 11.50

Prime (average) 10.60 11.20 13.08 15.13 11.81 10.12 10.94 11.50

Exchange rates

$/R (average) 6.33 6.77 7.05 8.22 8.42 7.67 7.86 8.00

£/R (average) 11.50 12.51 14.09 15.06 13.10 12.03 13.05 13.20

R/¥ (average) 17.44 17.30 16.77 12.48 11.25 11.45 12.26 13.13

€/R (average) 7.83 8.52 9.71 12.01 11.67 10.49 10.80 10.80

a=actual

f=forecast

2

Exchange rate forecast

Quarterly averages Q2 2010 Q3 2010 Q4 2010 Q1 2011 12-month trading range

EUR/USD 1.350 1.366 1.398 1.390 1.30 – 1.60

GBP/USD 1.522 1.571 1.613 1.678 1.40 – 1.90

USD/JPY 88.00 86.00 87.00 85.00 80.0 – 105.0

USD/ZAR 7.450 7.850 8.138 8.250 6.80 – 8.50

EUR/ZAR 10.058 10.723 11.376 11.468 8.84 – 13.60

GBP/ZAR 11.342 12.328 13.124 13.842 9.52 – 16.15

ZAR/JPY 11.812 10.955 10.691 10.303 10.00 – 12.35

Consumer inflation Prime rate forecasts

Headline CPI - % y/y Last prime rate change: 26 March 2010

2010 2011 2007 2008 2009 2010 2011

January 6.2 a 5.5 12.50

a 14.50

a 15.00

a 10.50

a 10.00

February 5.7 a 5.5 12.50

a 14.50

a 14.00

a 10.50

a 10.00

March 5.1 5.5 12.50 a 14.50

a 13.00

a 10.00

a 10.50

April 5.0 5.4 12.50 a 15.00

a 12.00

a 10.00 10.50

May 4.9 5.4 12.50 a 15.00

a 11.00

a 10.00 11.00

June 4.9 5.3 13.00 a 15.50

a 11.00

a 10.00 11.00

July 5.1 5.2 13.00 a 15.50

a 11.00

a 10.00 11.50

August 5.2 5.1 13.50 a 15.50

a 10.50

a 10.00 11.50

September 5.0 5.3 13.50 a 15.50

a 10.50

a 10.00 11.50

October 5.1 5.4 14.00 a 15.50

a 10.50

a 10.00 11.50

November 5.2 5.4 14.00 a 15.50

a 10.50

a 10.00 11.50

December 5.2 5.4 14.50 a 15.00

a 10.50

a 10.00 11.50

Average 5.2 5.4

Low 4.9 5.1

High 6.2 5.5

3

Introduction

Macroeconomic newsflow has finally begun to reflect genuine

improvements in broad economic health. However, the data remain

consistent with a somewhat anaemic recovery in advanced economies.

Investor sentiment, which has been buoyed by growing global business

and consumer confidence, realised that as the economic recovery

gains a foothold, paradoxically, the forces driving the recovery – cheap

government funding and low interest rates – will inevitably be reversed.

The first-quarter earnings’ reporting season, which begins this month,

will shed light on the financial health of the private sector. Against this

uncertain background, sovereign debt vulnerabilities continue to muddy

the broader outlook. Simultaneously, China is in the process of

gradually de-pegging its currency from the US dollar.

International economy

A number of data points are suggesting that the economic recovery of

the United States (US) is relatively sound. The Institute of Supply

Management (ISM) manufacturing index has significantly surpassed

pre-Lehman collapse levels, reaching 59.6 in March. Meanwhile, the

ISM non-manufacturing index increased from 53 in February to a three-

year high of 55.4 in March. Hence, to some extent the recovery is

spreading beyond the export-orientated manufacturing sector.

Financial markets responded particularly positively to the gain of

162 000 non-agriculture jobs in March. Not only is the addition a

dramatic improvement from the 14 000 decline experienced in

February, but it is an even more dramatic improvement considering the

average 700 000 jobs lost each month in 2009. That said, 48 000 of

the positions were temporary hires linked to the US census.

The Federal Reserve (Fed) chairman, Ben Bernanke, recently stressed

that the unemployment rate of 9.7% remains a serious concern –

especially given the large share that has been out of the labour force

for more than six months. While labour shedding has clearly slowed

(perhaps even halted), hiring is likely to remain weak throughout the

year, containing economic activity over the near term.

The housing market has shown few signs of meaningful recovery.

Granted, the 7.8% month-on month (m/m) fall in the pending home

sales index during January was reversed by the 8.2% m/m increase in

February. However, the figures remain depressed relative to pre-crisis

levels.

Perhaps of most concern is the fact that the important drivers of the

recovery are wilting.

First, re-stocking is in all likelihood complete, meaning the

strength of underlying demand matters most looking ahead.

Second, broad access to cheap government funds has become

unsustainable and is likely to end soon. Similarly, improving

economic data and increasing prices at the factory gate indicate

that keeping the Fed Funds Rate at “excessively low levels for an

extended period of time” is likely to cease at year-end.

Ben Bernanke unambiguously warned that the arithmetic is simple: To

avoid large and sustained budget deficits, the nation will ultimately

have to choose among higher taxes, modifications to entitlement

programme, less spending or some combination of the above.

Treasury yields, which serve as the benchmark for lending, are already

trending higher. Worryingly, the removal of these vital stimulants could

undermine the economic recovery, given that the ability of genuine

demand to take over the reins is, at a minimum, questionable.

Expect a relatively tepid economic growth profile. The Organisation for

Economic Co-operation and Development (OECD) seemingly agrees,

forecasting that the US gross domestic product (GDP) will expand by

2.4% y/y and 2.3% y/y in the first two quarters of 2010, which is

significantly slower than the 5.6% y/y enjoyed in the final quarter of last

year. Clearly, higher borrowing costs for consumers and corporates,

plus rising interest on government debt will prove difficult to ignore.

The Euro-zone is facing even more difficult and complex challenges.

The Euro-zone’s economic recovery spluttered at the tail-end of last

year. Euro-zone GDP was static in the last three months of 2009,

translating into a 2.2% y/y contraction for the year. The relatively poor

performance illuminates the fundamental weakness in domestic

demand across continental Europe. The perilous position was further

exacerbated by the withdrawal of government support, which began at

the tail-end of last year. The situation was further compounded by poor

weather in Northern Europe during the first months of 2010, which will

inevitably provide a headwind to the Q1 2010 growth print.

The European Central Bank (ECB) left official interest rates on hold in

April and left its unconventional liquidity-supportive policies intact. The

decision reflects the sombre assessment of the Euro-zone economic

prognosis.

Promisingly, much like the US, some recent macroeconomic newsflow

has bolstered sentiment. In fact, the Euro-zone’s Purchasing

Managers’ Index (PMI), having found support from a softer euro and

improved external environment, increased from 53.7 in February to

55.9 in March – the largest monthly gain in nearly three years.

Unfortunately, Germany experienced stagnation in industrial production

(in month-on-month terms) in both January and February. Worryingly,

the manufacturing sector – specifically Germany’s – is essential for the

Euro-zone’s economic recovery given the weakness in the household

sector. Consider that Euro-zone retail sales, having declined by 0.2%

m/m in January, contracted by 0.6% m/m in February.

4

Figure 1: German industrial production

Source: Bloomberg

The sovereign debt vulnerabilities of most Euro-zone nations are

holding continental Europe’s economic vista hostage. Most

prominently, Greece’s, but also Spain and Portugal’s, fiscal

vulnerabilities have sapped the swagger out of any positive

macroeconomic news.

The generalised appreciation of Greece’s fiscal challenges and the

insecurity are best articulated by the spread between the Greek 10-

year bond and the German 10-year Bund, which increased by 100

basis points in less than a month, surpassing 4.5% in April. The spread

is currently at its widest since Greece joined the Euro-zone.

Figure 2: Spread between Greek and German 10-yr government

bonds

Source: Bloomberg

Over the past month, the Euro-zone members have committed funding

support to the Greek government. Using seemingly similar logic to that

used when the then Treasury Secretary, Hank Paulsen, faced a severe

freeze in US repo markets, the government’s re-assurance was meant

to be sufficient to divert disaster and enable market rates to normalise

without an actual intervention. However, as in the case of the US repo

market, the guarantee has done little to alleviate uncertainty. Recall the

old adage: if you have to defend your credibility, your credibility is

already gone.

Most worrying, the support package failed to provide an interest rate

ceiling, meaning the funding was likely to be priced at market rates,

which are elevated. Given that Greece’s debt burden is expected to

breach 120% of GDP this year and trend towards 150% by 2015, the

sheer size of the borrowing requirement and the elevated repayment

costs fuel the risk of Greece’s default. Fitch Ratings Agency

downgraded the outlook of both foreign and domestic long-term

currency ratings to negative. In light of the higher costs, the ECB’s

president, Jean-Claude Trichet, is encouraging Greece to pursue

bilateral loans, which could come with a lower repayment cost.

However, by mid-April, a number of proposals were under discussion,

aiming to provide clarification of the terms attached to the funds that

Greece can access in emergency.

The fiscal troubles facing Greece are not confined to Greece;

elsewhere, Portugal and Spain have recently seen their 10-year bonds

spike at 4.33% and 3.89%, respectively. The deterioration of fiscal

positions across the developed world has proven so severe that deficit

reduction initiatives will impinge on economic growth. Recognising the

inevitable fiscal tightening across the region, economic growth will

prove sluggish and interest rates will remain on hold throughout 2010.

The United Kingdom’s (UK) Monetary Policy Committee (MPC) held

interest rates steady in early April. Given the consensus, which

suggests that UK inflation will weigh in at 1.3% in 2010 and remain

below 2% in 2011, the possibility of an additional rate cut cannot be

excluded. However, the MPC is still trying to determine the full impact

of the USD300 bn of asset purchases made under the quantitative

easing programme.

In the UK, election campaigning began in the first week of April as the

general election will occur on 6 May 2010. Predictably, the discussions

immediately focused on how to resolve the nation’s fiscal position,

which is currently at a post-war high of 11.8% of GDP. At this juncture,

the Gordon Brown-led Labour Party is trailing in the polls to David

Cameron’s Conservative Party. However, as the economic recovery

gains momentum, the tide will gradually turn in favour of the Labour

Party. Hence, the Q1 2010 growth print and other macroeconomic

news could shape the election results.

GDP growth in Q4 2009 was upwardly revised from 0.3% to 0.4%. In

addition, some survey indicators are pointing to stronger growth in Q1

2010. Furthermore, while industrial production contracted by 0.1% y/y

in February, the figure is a dramatic improvement from the -3.8% y/y

and -1.6% y/y recorded in December and January, respectively.

Moreover, the Halifax house price index, after declining by a

seasonally adjusted 1.6% m/m in February, increased by a seasonally

adjusted 1.1% m/m in March, implying that last month’s decline was

merely a stumble in a positive trend. Meanwhile the three-month

moving average increased from 4.5% y/y in February to a 27-month

high of 5.2% y/y in March.

Most commodity prices have already returned to the levels that

prevailed before the financial crisis. Growing optimism about the

sustainability of the global recovery in emerging markets – led by

China, India and Brazil – has proven supportive. Adding to the tailwind,

speculators anticipating commodity demand growth in 2011, when the

global economic activity is uniformly positive, have also played their

part in pushing commodity prices higher.

-25

-20

-15

-10

-5

0

5

10

15

-8

-6

-4

-2

0

2

4

2002 2004 2006 2008

Per

cen

t

Per

cen

t

m/m (LHS) y/y (RHS)

3.5

4.5

5.5

6.5

7.5

0.0

1.0

2.0

3.0

4.0

5.0

2006 2007 2008 2009

Greece vs. German Spread (LHS)Greece yield (RHS)

Percentage points

5

Figure 3: Commodity prices broadly trending higher

Source: Bloomberg

Furthermore, China is in the process of gradually de-pegging its

currency from the US dollar, which has also proved supportive for

commodity prices. Recall, commodity prices are typically inversely

related to the US dollar. Last month, the People’s Bank of China’s

chairman stated that the dollar-peg would end sooner or later.

Furthermore, it is widely accepted that China’s policy makers are trying

to curb bank lending and inflation; both goals will benefit from a

stronger Renminbi. Already, discussions of widening the daily trading

range of the Renminbi are being held. At present, the Renminbi is

allowed to move within a range of 0.3% either side of a fixed exchange

rate to the US dollar, limiting the rate of adjustment. Perhaps

anticipating the change in tides, US Treasury Secretary Timothy

Giethner decided to postpone a report scheduled for mid-April that

would have had to make an unambiguous classification of whether or

not China is a “currency manipulator”.

Once more it is worth stressing that currency appreciation will fail to

prove to be the silver bullet to global imbalances. For a start, a large

share of the value of China’s final exports is originally imported from

elsewhere. In an extreme example, the Sloan Foundation estimates

that a mere USD4 (less than 3%) of the final value of an iPod

assembled and exported from China is organically produced in China.

Unsurprisingly, China’s surplus with the US falls by 30% if only the

value-added components are included. In contrast, Japan’s surplus

expands by 25%. More broadly, lower tariff barriers and transport costs

have enabled a larger share of the value of a nation’s exports to

originate from elsewhere. Therefore, a stronger currency will make

imports cheaper.

Figure 4: Share of export value-added originating from elsewhere

Source: OECD

South Africa

The extent of economic slack is reducing with the recent, albeit slow,

improvement in spending levels of households. Evidence is gathering

that the middle-income mass market is freeing itself up from its

overextended debt positions, providing early signs of a self-sustaining

recovery in economic activity.

Detailed breakdown of the expenditure approach to GDP

Household demand:

Household consumption expenditure rose by an annualised

quarterly rate of 1.4% in 2009 Q4 – the first increase in six

quarters – driven by advances in durable goods (15.2%) and

services (1.1%). The rate of decline in non-durable and semi-

durable goods slowed significantly in the quarter to below a 1%

contraction, from high single-digit declines in previous quarters.

Consumer confidence more than doubled in Q1 this year to 15

index points from 6 index points in 2009 Q4. The recovery was

largely driven by increased optimism among middle-income

earners, which have lagged other income cohorts owing to their

comparatively high levels of indebtedness.

Households have become less pessimistic over the

appropriateness of the current time to purchase durable goods

and have become increasingly optimistic over expected

economic conditions and the state of their own finances in 12

months’ time.

Increasing evidence of deleveraging is being obtained as

households’ savings as a ratio to disposable income improved

to -0.1% in Q4 from -0.4% in Q3 last year. This comes despite

evidence that household debt as a ratio to income rose to

79.8% in Q4 from 78.4% in Q3; the rise was spurred by a

decline in the growth rate of nominal household income relative

to Q3, as inflation is receding.

Excluding the impact of inflation, real disposable income grew

by a quarterly annualised rate of 2.7% in Q4, on the back of

rising compensation to workers when compared to the previous

year. This signals that household demand will become stronger

0

50

100

150

200

250

300

2007 2008 2009 2010Gold Copper Tin Nickel Lead

Index Jan 2007=100

5 10 15 20 25 30 35

Spain

Italy

China

Germany

France

US

Japan

Brazil

Per cent

2005 1995

6

within the next few months, reining in the sluggishness of retail

sales growth over the past few months.

Figure 5: Household consumption expenditure on goods and

services

Source: SARB

New passenger car sales rose by 16.5% y/y in Q1 from -10.5%

y/y in Q4 last year. New motor sales are expected to rise by

between 12% and 18% this year, following -23.8% y/y in 2009.

House price growth has also recovered, albeit belatedly,

increasing to 0.5% y/y in March – the first time since early 2008 –

following a decline of -1.9% y/y in February. Nominal house price

growth of between 5% and 10% is expected this year, from

-4.2% in 2009.

Figure 6: Household consumption expenditure, house price and

vehicle sales’ growth

Sources: NAAMSA, SARB, Standard Bank Group

Household earnings’ potential:

A swift recovery in several industries has seen rising wage

demands from labour unions of up to 20% in the metals industry.

Wage growth may be rigid on the downside this year, which,

together with a more benign inflation profile averaging 5.2% in

2010, could see real wage gains of up to four percentage points.

Figure 7: Household real income growth inversely related to

inflation

Sources: SARB, Stats SA, Standard Bank Group

The better-than-expected Q4 figures, the recent rate cut and

more benign inflation profile support the revision in household

consumption expenditure growth to 2.4% this year (previously

2%).

Gross fixed capital formation:

Private sector capital formation declined by a less-than-expected

quarterly annualised growth rate of 2.3% in Q4 from -14.5% in

Q3. This together with an improved profit prognosis in the mining

industry on the back of rising commodity prices and rising

business confidence in select manufacturing industries could see

a slower rate of decline in private sector investment this year.

This has been corroborated by improved commercial vehicle

sales’ statistics; particularly of light and extra heavy vehicles,

which are up 10% y/y and 13% y/y, respectively, in Q1. We

anticipate a milder contraction of 1.7% this year, from -7% y/y in

2009.

Figure 8: Fixed capital formation by type of organisation

Source: SARB

Confirmation of parastatals’ project continuity will see the

contribution to fixed capital formation remaining strong, however

with the rate of growth slowing down from last year’s 40.7%

growth.

-20

-10

0

10

20

30

2000 2002 2004 2006 2008

Semi-durables Durables

Non-durables Services

% y/y

-30

-15

0

15

30

45

-10

-5

0

5

10

15

2000 2002 2004 2006 2008 2010

Household consumption expenditureCar sales (RHS)House price growth (RHS)

% q/q annualised % y/y

2

5

8

11

14

17-9

-6

-3

0

3

6

9

12

2000 2002 2004 2006 2008 2010Real disposable income (LHS - inverse scale)

Targeted inflation (CPIX to '08, CPI from '09)

% q/q annualised %

-40

0

40

80

-24

0

24

48

2000 2002 2004 2006 2008

Private business enterprises (58.1% of total)

General government (15.6% of total) - smoothed

Public corporations (26.2% of total) - smoothed (RHS)

% q/q annualised % q/q annualised

7

Table 1: Average annual public spending on infrastructure from

2010/11 to 2012/13

General

government

State-owned entities

Public-private partner-ships

Annual value R132.6 bn R144.8 bn R9.1 bn

Share of total spend

43% 53% 3%

Nominal growth

13% 8% -19.8

Source: SA National Treasury

Given the improved prognosis for private sector investment

participation, bolstered by the recent rate cut, we have raised our

forecast for real capital formation to 2% this year (previously

1.3%).

Net exports:

Sustained positive income growth in our major trading partner

countries supports a relatively improved outlook for exports this

year, which is critical in light of the rand’s sustained strength. We

deem strong global growth as the chief driver of export volumes,

despite the rand’s strength.

Commodity bias in SA’s export basket, together with rising

commodity prices, should ensure that terms of trade remain

supportive of the trade balance. Export volumes are supported

by strong growth in Asia.

With capital goods accounting for 50% of the import basket,

imports should remain sluggish until a broad-based recovery in

the economy unfolds. Capital and machinery-based imports will

remain limited to parastatals’ infrastructure programmes as

private sector imports are likely to improve during 2010 H2.

Inventory building probably only accounts for a quarter to a third

of the import basket.

As such, these trends generally support mildly positive to mildly

negative trade balances, with more substantial deficits likely from

2010 H2.

Figure 9: Trade volumes and price indices

Source: SARB

Detailed breakdown of the production approach to GDP

Mining and quarrying sector (4.6% of GDP; 6% of formal non-

agricultural employment):

Current performance: In February, mining output rose by 5.8%

y/y from 9.7% y/y in January, supported by diamond output

(149.2% y/y), chromium ore production (123.4% y/y),

manganese ore (64.6% y/y) and nickel output (58.4% y/y).

Top contributors to growth: Platinum group metals, nickel,

diamonds, iron ore and copper.

Emerging trends: Rising commodity prices, especially copper,

could see mines tap into old lower grade ores, which may raise

input costs. Investment interest in coal and copper continues to

dominate.

Risks: Dollar prices of input costs, for example, oil and steel, are

rising. Sustained rand appreciation will hurt export earnings;

however, the sector remains supported by low rand-denominated

domestic input costs. Following delayed maintenance during the

recession, mines are refocusing on these tasks, but output

growth could subsequently be sluggish. Recovery may stimulate

job creation, but skills remain in short supply. Mines have

expressed concerns over future water supply security and some

have placed investment on hold owing to electricity cost and the

supply crisis.

Table 2: Share of top mining exports

2004 2006 2008

Platinum group metals 26% 27% 27%

Gold and uranium ore 37% 28% 25%

Coal and lignite 17% 16% 15%

Source: Department of Trade and Industry

Figure 10: Mining Gross Value Added (GVA) vs employment

Sources: SARB, Stats SA

The mining sector reported a decrease of 33 000 jobs in 2009

Q4 compared to 2008 Q4. However, relative to Q3, the sector

shed a smaller 2 000 jobs, which is markedly lower than the

18 000 jobs shed in Q1. In total, 114 000 jobs were lost in 2009,

reversing total jobs created between 2007 Q4 and 2008 Q4.

50

70

90

110

130

150

170

190

2000 2002 2004 2006 2008

Volume of exports Prices of exportsVolume of imports Prices of imports

Index (2000=100)

350

390

430

470

510

550

-40

-30

-20

-10

0

10

20

30

2000 2002 2004 2006 2008 2010

Employment (RHS) Mining and quarrying

% q/q annualised Number '000

8

Manufacturing sector (14.4% of GDP; 14.8% of formal non-

agricultural employment):

Current performance: Output growth eased to 2.7% y/y in

February from 3.5% in January, with export-related industries,

automotive industries, iron and steel, and metals and machinery

supporting growth.

Top contributors to growth: Output of motor vehicles and

accessories, basic iron and steel products, and chemicals and

plastic products.

Emerging trends: New orders remain lively, but manufacturers

may be hesitant to bolster inventories in fear of faltering demand.

Optimism over future business expectations a year from now

remains firm, and has supported employment creation of late.

Increasing evidence is obtained that consumer-related sectors

are scaling up production. Historically, consumer-goods-

producing output has recovered six months following sustained

interest rate stimulus.

Risks: Despite firm long-term business expectations, current

business confidence remains low despite recent recovery in

output. The rand is denting optimism in export and import-

competing markets. Input costs are rising at a faster pace than

selling prices, keeping profits capped. This may prevent rising

capacity utilisation rates and delay investment prospects.

Figure 11: Manufacturing GVA vs employment

Sources: SARB, Stats SA

Employment shrank by 91 000 in 2009 Q4 compared to the

same period in 2008. In total, the sector shed 349 000 jobs in

2009, following job declines of 84 000 in 2008.

Electricity, gas and water (2% of GDP; 0.7% of formal non-

agricultural employment):

Current performance: Electricity consumption rose by 8.5% y/y in

February up from 8.3% y/y in January. On a quarterly basis,

electricity consumption has accelerated this year relative to the

final months of 2009.

Risks: Electricity consumption has returned to pre-recession

levels, and increasing winter demand along with additional

pressure from World Cup consumption could place strain on the

grid, reducing the reserve margin further.

Figure 12: Utilities GVA vs employment

Sources: SARB, Stats SA

Relative to 2008 Q4, employment in the utilities sector remained

unchanged in Q4 after 1 000 jobs were slashed in the previous

quarter.

Construction (4.1% of GDP; 5.5% of formal non-agricultural

employment):

Current performance: The rate of growth in real building plans

passed of residential property eased to -12.1% y/y in January,

from -36.8% y/y in 2009. For non-residential buildings, the rate of

decline increased to -55.3% y/y in January from -6.6% y/y in

2009. However, real residential building plans passed in the

three months to January, compared to the three months to

October 2009, rose by 0.4% y/y, confirming a bottoming in the

sector. An increase was also reported for additions and

alterations at 4.6% over the corresponding period. In respect of

buildings completed, the non-residential sector is still adding new

supply to the market, which aggravates existing oversupply and

vacancy rates.

Table 3 illustrates the detail of building plans passed when

compared to the corresponding period the year before, and

confirms that the lower turning point may have been reached in

building plans passed for residential property above 80 square

metres as well as for additions and alterations. However, as

expected, non-residential building plans continue to slide.

1050

1100

1150

1200

1250

1300

1350

-30

-20

-10

0

10

20

2000 2002 2004 2006 2008 2010

Employment (RHS) Manufacturing

% q/q annualised Number '000

30

40

50

60

70

-10

-5

0

5

10

15

2000 2002 2004 2006 2008 2010

Employment (RHS) Electricity, gas and water

% q/q annualised Number '000

9

Table 3: Growth in building plans passed (in square metres, y/y)

November 2009 – January 2010 vs November 2008 – January 2009

#

Residential:

< 80 square metres -39.7% (-16.9%)

> 80 square metres -13.6% (-19.4%)

Flats and townhouses -38.1% (-30.9%)

Other* -44.9% (-70.7%)

Non-residential:

Office and banking space -58.6% (-56.9%)

Shopping space -53.3% (-33.9%)

Industrial and warehouse space -27.4% (-5.7%)

Other** 2% (24.6%)

Additions and alterations:

Dwelling houses -7.8% (-14.1%)

Other buildings -13.4% (-19.5%)

# Previous three months’ data in brackets

* Includes hotels, motels, guest houses, entertainment centres, and B&Bs

** Includes schools, hospitals, and sports and recreation facilities Source: Stats SA

Top performing industries: Civil engineering supported by

government infrastructure.

Emerging trends: According to the South African Federation of

Civil Engineering and Construction (SAFCEC), civil engineering

turnover is expected to decline in real terms by 25% in 2010 from

-11.0% in 2009. However, strong demand is seen starting in

2011, which could see increased employment again. In this

environment price volatility cannot be ruled out.

Risks: The overall sector remains burdened by limited new

projects coming on stream and an oversupply of construction

firms. This may see liquidations remaining high in this sector. In

the interim, steel prices of select steel grades are rising. Oil

refinery shutdowns for maintenance procedures have caused

shortages in the supply of bitumen, which will result in a delay of

road construction, aggravating cash flow problems.

Figure 13: Construction GVA vs employment

Sources: SARB, Stats SA

Job losses gathered pace in Q4, with a total of 61 000 jobs lost

(compared to 2008 Q4) versus 51 000 and 33 000 in Q3 and Q2,

respectively. Further job losses are on the cards this year

following the maturity of several World Cup-related infrastructure

projects.

Wholesale and retail trade (13.8% of GDP; 20.1% of formal non-

agricultural employment):

Current performance: Real retail sales contracted by 1.7% y/y in

January, from -3.8% y/y in December and -4.9% y/y in 2009.

Top performing industries: In nominal terms, general retailers;

retailers of textiles, clothing and footwear; retailers of medical

goods, cosmetics and toiletries; and retailers of food, beverages

and tobacco performed positively over the past three months.

The growth laggards remain in the hardware and “other” retail

categories.

Emerging trends: In response to a mild improvement in overall

retail sales’ volumes and rising input prices, retailers have upped

their selling prices in Q1, which has reduced pressure on profits.

This trend has been pronounced in the durable goods market,

where more substantial restocking has occurred of late. The

semi-durable goods market has shown the first growth in sales’

volumes and profitability in Q1 since late 2007.

Risks: Sluggish improvement in household fundamentals such as

tardy employment and income growth and high debt remain

problematic.

Figure 14: Trade GVA vs employment

Sources: SARB, Stats SA

The annual increase in job losses rose in Q4 when 80 000 jobs

were shed, following 76 000 jobs in Q3. This brings the total

decline for 2009 to 268 000.

Finance, real estate and business services (20.5% of GDP; 22.1%

of formal non-agricultural employment):

Finance and insurance (45% of total sector): Deleveraging in

the corporate retail banking space continues to weigh on asset

growth. However, a mild improvement has been noticed in the

personal banking space, particularly in mortgage advances. Firm

150

210

270

330

390

450

510

-4

0

4

8

12

16

20

24

2000 2002 2004 2006 2008 2010

Employment (RHS) Construction

% q/q annualised Number '000

400

800

1200

1600

2000

-10

-5

0

5

10

15

2000 2002 2004 2006 2008 2010

Employment (RHS) Wholesale and retail trade

% q/q annualised Number '000

10

asset markets continue to support growth in the investment and

commercial banking space.

Real estate (35% of total sector): Banks are reporting

increased appetite for mortgage loans, with volumes of

applications and new grants slowly improving. This has seen a

recovery in house prices; however, sluggish growth envisaged

over the next few years suggests that profits on resale values will

remain ailing.

Figure 15: Financial intermediation and business services GVA vs

employment

Sources: SARB, Stats SA

The broader finance sector reduced its workforce by 118 000 in

the fourth quarter of last year, bringing the total jobs lost in 2009

to 361 000 relative to 2008. This exceeds the 261 000 jobs

created in this sector in 2008 and brings employment back to

levels prevailing at the end of 2006.

Transport, storage and communication (10.3% of GDP; 4.3% of

formal non-agricultural employment):

Emerging trends: Recovery in retail and wholesale trade will see

demand for road transport improve. Transnet is focusing on

expanding private sector participation, with the chief aim of

expanding key commodity export corridors.

Risks: Rising fuel prices and still-high logistic costs pose a risk to

the sector’s profitability.

Figure 16: Transport and communication GVA vs employment

Sources: SARB, Stats SA

Relative to the same period in 2008, the transport and

communication sector shed 7 000 jobs in Q4 2009. This brings

the total of labour layoffs in 2009 to 29 000 compared to an

increase of 22 000 in 2008.

General government and personal services (18.7% of GDP; 26.4%

of formal non-agricultural employment):

Figure 17: General government and personal services GVA vs

employment

Sources: SARB, Stats SA

Employment in the community, social and personal services

industry rose by 39 000 in 2009 Q4 compared to 2008 Q4. In

total, 270 000 jobs were added in 2009 compared to an increase

of 320 000 in 2008.

Conclusion

The final cost of the global financial crisis and the associated recession

it induced is difficult to quantify. According to the Bank of England, the

fact that global output fell 6.5 percentage points below its long-run

trend in 2009 has cost the world USD4 trillion. Global trade is believed

to have fallen by 12% last year and volumes won’t surpass 2008

numbers until 2011. While such estimates are debatable and can be

contested, the swiftness with which confidence in the global financial

system collapsed in late 2008 will prove an enduring lesson of the

financial crisis. Psychological forces continue to drive markets in the

recovery period.

Recent data in the domestic economy reveal that a mild recovery in

household demand is underway. The recent cut in interest rates will

serve to bolster confidence and the degearing cycle in future months.

In addition, monetary policy relaxation will contribute to stabilising

conditions in the labour market, which augurs well for the recovery in

household demand. Favourable conditions in export markets have

begun to permeate the domestic private sector, which has seen

optimism over future investment prospects gaining traction. As a result,

the economic growth prognosis for 2010 has been raised to 2.9%.

0

500

1000

1500

2000

2500

-5

0

5

10

15

20

2000 2002 2004 2006 2008 2010

Employment (RHS) Finance and business services

% q/q annualised Number '000

150

200

250

300

350

400

-3

0

3

6

9

12

2000 2002 2004 2006 2008 2010

Employment (RHS) Transport and communication

% q/q annualised Number '000

1400

1680

1960

2240

2520

-5

0

5

10

2000 2002 2004 2006 2008 2010Employment (RHS) General governmentPersonal services

% q/q annualised Number '000

11

Group Economics Goolam Ballim – Group Economist +27-11-636-2910 goolam.ballim@standardbank.co.za

International

Jeremy Stevens

+27-11-631-7855

Jeremy.Stevens@standardbank.co.za

South Africa

Johan Botha Shireen Darmalingam Danelee van Dyk

+27-11-636-2463 +27-11-636-2905 +27-11-636-6242

Johan.botha@standardbank.co.za Shireen.darmalingam@standardbank.co.za Danelee.vanDyk@standardbank.co.za

Rest of Africa

Yvette Babb Jan Duvenage Anita Last Yvonne Mhango

+27-11-631-1279 +27-11-636-4557 +27-11-631-5990 +27-11-631-2190

Yvette.Babb@standardbank.co.za Jan.duvenage@standardbank.co.za Anita.last@standardbank.co.za Yvonne.Mhango@standardbank.co.za

Kenya Tanzania Uganda Zimbabwe

Botswana Lesotho Namibia Swaziland

Malawi Mauritius Mozambique

Angola DRC Ghana Nigeria Zambia

Simon Freemantle

+254 (20) 3269 027

Freemantles@stanbic.com

Kenya Uganda Tanzania

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