South African economy recovery remains weak

Written by Will Peters Friday, 10 September 2010 09:26

Standard Chartered worried at lack of structural change in South African economy.

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The South African economy has been unable to capitalise on 550bps of interest rate easing in the current cycle leading prominent economists to worry about the economies ability to restructure itself adequately.

"While the sharpest y/y decline in South African GDP (2.7% in Q2-2009, according to Bloomberg data) was less dramatic than in many other economies, especially other emerging markets, South African growth since the global crisis has been unexciting," says Razia Khan at Standard Chartered, the global banking giant. 

Indeed, in absolute terms, GDP has only just managed to pull ahead of its pre-crisis level, while most other emerging markets have seen their GDP levels soar.

Growth has compensated for the contraction seen during the crisis, but has not added much more. This is a big concern for an economy hoping to undergo deep structural changes, reduce poverty levels, and lessen income inequality. 

Consumption still hindering the economy

Standard Chartered see consumption constraints as being a key hinderance to further growth:

"South Africa’s pre-crisis boom years were marked by remarkably unbalanced growth. Although the economy became more open during this time, which coincided with a significant commodity price boom, South Africa’s share of global exports nonetheless declined.

"It was the domestic economy that outperformed.

"The strength of the South African rand (ZAR), its beneficial impact on inflation, and resulting multi-decade lows in interest rates, brought about a step change in trend growth.

"The emergence of a new middle class and the easy availability of credit prior to the June 2007 introduction of the National Credit Act gave rise to a credit-fuelled rise in consumption. 

"While the growing imbalance between domestic savings and consumption contributed to a significant widening of the current account deficit (its quarterly peak was over 9% of GDP), growth at least benefited.

"South Africa’s recession saw a short-lived narrowing of the current account deficit, but consumption – accounting for 60% of GDP – has yet to show signs of life.

"Even though South Africa’s well-regulated banks made it through the crisis largely unscathed (there
was a brief cyclical rise in NPLs as past credit excesses caught up with the banks), y/y growth in private-sector credit extension has only just nudged its way back into positive territory. Household consumption, although growing, remains subdued relative to pre-crisis levels."