Deconstructing Growth in South Africa - 30 May 2007

THE most striking feature of the gross domestic product (GDP) figures released on Tuesday was the growth notched up by the construction industry. The sector's output surged by a stellar 21.3% in real terms, far outcliping all the others.

The figure is quarter-on-quarter, seasonally adjusted and annualised - in other words, it reflects what the construction sector's growth would be for a full year if the first quarter's performance was sustained. (All figures are reflected on that basis, unless otherwise stated.)

The huge construction number came after an already high 16.5% growth rate in the fourth quarter of last year.

Because the construction industry has such a low weighting in GDP - only about 3% - its massive growth added "only" 0.7 percentage points to the 4.7% overall economic growth rate in the first quarter. But that was a welcome addition during a period when many other sectors showed a slowdown in growth.

The impressive growth in construction is proof that the public sector's huge infrastructure spending programme is getting off the ground in a big way. It includes Eskom's investment in new power generating capacity, the Gautrain and other similar projects.

Bottlenecks

It's important to note that the public sector's infrastructure programme has taken up the slack when other sectors such as manufacturing and retail have slowed down. That was intended to be the case.

But the question is whether the public sector hasn't bunched too many projects together, which will result in bottlenecks and unsustainability of growth in the construction sector. The current account deficit will also take strain, as these projects are import intensive.

For years, government spoke about and planned infrastructure spending. But nothing happened and no-one believed that it was going to happen. Eskom, which years ago should have been investing in new generating capacity, is only now coming to the party.

It's a similar situation at Transnet, which for years promised to improve infrastructure without any real action.

Is the 21% real growth rate in construction sustainable? Probably not.

Lack of skills

Shortages of skills as well as materials will lead to bottlenecks in construction. A huge portion of Eskom and Transnet's spending will be on imports, which have to be sourced in markets where there already are shortages. The reason for the shortages of capital goods in foreign markets is because SA isn't the only emerging market embarking on a huge infrastructure spending programme.

But the spending on construction is vital to lift SA's economic growth potential. Without investment in ports, rail, roads and electricity, the economy won't be able to grow at the targeted 6% rate.

However, that doesn't mean there won't be some white elephants constructed, which add to the numbers now but will turn out to have been useless later. All the spending on soccer World Cup stadiums comes to mind; it's doubtful that all of these stadiums will be self-sustaining after the big event.

Another striking aspect of the sectoral breakdown in GDP is the contraction in the mining industry. Perceptions that SA's growth is benefiting from a commodities boom are entirely misplaced, as mining output contracted 7.8% in the first quarter.

What commodities boom?

It's difficult to explain the weak performance of the mining sector. One analyst says the first quarter figures compared with the fourth quarter figures usually dip, because of some leave schedules that should have gone through in December going through in January. This isn't taken into account in the seasonal adjustment. He says it's better to look at the year-on-year rate of change, rather than the quarterly figure.

But the year-on-year rate of growth in mining was a paltry 1.2%, which also flies in the face of the so-called commodities boom. Yet analysts expect a better performance in the quarters ahead, as new mining projects come on stream. Mining has a weighting of less than 6% of GDP.

The most important sector in the economy - finance, real estate and business services - put in a good performance with growth of 5.7%. This is down on the previous quarter, as was expected, given interest rate hikes. But the sector, with a share of almost 20% in the economy, contributed 1.1 percentage points to overall GDP growth.

The trouble with this sector playing such a big role in the economy is that it's highly skills intensive. Its capacity to absorb SA's massive pool of unskilled labour is limited yet it makes a very important contribution to overall economic growth.

SA like developed countries

In this shift away from sectors like manufacturing towards services, SA is a bit like the developed countries in the world. They underwent a process of deindustrialisation, where manufacturing increasingly shifted to the economies offering cheap labour.

One policy response to the shift would be for government to try to boost manufacturing and labour-absorbing sectors. It's hoped that government's long-awaited industrial policy - due for release this week - will do just that.

It must also be said that growth generated by the financial services sector isn't to be sniffed at, because it provides government with some of the revenue from which to pay social grants. In that way, the sector contributes to alleviating poverty.

These are a just few quick observations on the sectoral breakdown of the latest GDP figures.

This article appeared on www.fin24.co.za on 30.05.2007, written by Greta Steyn

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