Exports and Households shrink the economy

Prof Chris Harmse

The Numbers

GDP Q1 2009 (QoQ SAA): -6.4% compared to -1.8% Q4 2008
GDP Q1 2009 (QoQ SA): -1.7% compared to -0.5% Q4 2008
CAD Q1 2009 (% of GDP SAA) 7.0% compared to 5.8% Q4 2008
CAD Q1 2009 (% of GDP actual) 5.8% compared to 5.7% Q4 2008
SAA = Seasonally Adjusted and Annualised; SA = Seasonally Adjusted

False words are not only evil in themselves, but they infect the soul with evil – Plato (427 BC - 347 BC), Dialogues, Phaedo

Analysis of the economy according to the June 2009 Quarterly Bulletin

Introduction

The South African Reserve Bank had to reduce its GDP spending estimate by R16.2 billion (Seasonal Adjusted and Annualised in real terms) in Q1 2009 in order to confirm Statistics South Africa’s negative growth rate of 6.4%. The actual reduction was R6.99 billion in Q1 2009.

Nevertheless, the South African economy is contracting in more or less the same pace as European economies. Table 1 Shows that South Africa’s rate of contraction is faster than in the US, but a bit slower than in Europe and Japan. The numbers show that a revival to growth will depend on a recovery in the US.

Table 1

Contractions in household spending and export earnings were the main reasons for the Seasonal Adjusted but Unannualised Quarter over Quarter GDP to shrink by 1.7% in Q1 2009. This follows the contraction of 0.46% in Q4 2008. The GDE posted a positive growth rate mainly on account of a slower rate of decline in inventories as well as positive government and investment spending.

Table 2

Households

Households experienced their third consecutive quarter of spending contraction. Moreover, Table 2 shows that the rate of contraction is increasing (from -0.24% in Q3 2008 to -1.3% in Q1 2009.)

According to the Quarterly Bulletin spending on all three categories of goods contracted. On a SAA basis spending on durable goods contracted by another huge 19.2% (-20.1% in Q4 2008), whilst that on semi-durable and non-durable contracted by respectively -7.9% and -12.2%. Spending on services however accelerated to a rate of 7.5% from a contraction of -0.1% in Q4 2008.

Whereas household spending contracted by -1.26% (QoQ seasonal adjusted but unannualised in real terms), household disposable income contracted by - 1.14%. As a result households’ rate of dissaving continued. Though the QoQSA rate of dissaving receded by 56% in Q1 2009 it was still -0.1% of disposable income (-0.2% in Q4 2008.)

With disposable income on a real declining trend but credit growth still increasing albeit at a very slow rate, total debt to disposable income increased to 76.7% in Q1 2009. Due to lower interest rates the debt service ratio declined from 11.7% in Q4 2008 to 10.9% in Q1 2009.

Government

General government expenditure accelerated from a QoQSA rate of 0.9% in Q4 2008 to 1.45% in Q1 2009. However, this was mainly on account of consumption expenditure (e.g. two military aircrafts were purchased) as its QoQSAA rate of real gross fixed capital formation slowed from 2.3% in Q4 2008 to 0.6% in Q1 2009. The slow pace of government investment is a source of concern as the economy foregoes the positive multiplier impact of investment on jobs.

Real Gross Fixed Capital Formation (GFCF)

GFCF posted positive QoQSA growth of 0.65% in Q1 2009 but it was at a slower pace than the 0.74% in Q4 2008. Both private business enterprises and general government’s pace of investment slowed. However, public corporations upped their investment to 6.4% (QoQSAA) from 4.1% in Q4 2008.

Current Account Deficit (CAD)

According to the Reserve Bank the CAD increased to 7% of GDP in Q1 2009 from 5.8% in Q4 2008. This is the seasonal adjusted and annualized CAD. Table 3 below however shows that the actual CAD remained the same as in Q4 2008.

This shows that the acceleration in the CAD as % of GDP can be ascribed to seasonal adjustment factors. Nevertheless, Table 2 shows that a contraction of 18% in exports between Q4 2008 and Q1 2009 contributed to the CAD not receding. The trade deficit thus was thus responsible for 29% of the CAD compared to 18% in Q4 2008. Similarly, larger payments to customs union countries increased the CAD by approximately R1 billion. The impact of the weakening world economy on the CAD is also evident in the smaller services and income deficits.

Table 3

Conclusion

The above numbers show that a revival in the South African economy will to a large degree depend on a recovery of the world economy, especially the US.

Household income and spending are under severe pressure. The government’s proposed public works job creation should however provide some relief.

However, due to the lack of a proper social safety net, middle- and high income households losing their jobs will not receive protection. As they are the big household savers, household saving will remain under pressure. This will keep the private sector (the largest savers in the economy) and thus investment spending under pressure. Actual saving (not seasonal adjusted and annualized) declined to 16.8% of GDP in Q1 2009 from 12.2% in Q4 2008. A revival in foreign demand is thus needed to inject production and jobs into the economy, whilst lower interest rates and government spending should provide support in the mean time.