South Africa Gauge Signals Strong First-Quarter Economic Growth
The first quarter of the year is traditionally a slow time for the South African economy. This is because a number of big projects are due to be completed in the final quarter of the year, which has historically meant an increase in supply.
“Growth” in the first quarter, as reported by the South African National Statistics Department, was a disappointment compared to last year, when an acceleration in the pace of recovery led to a revised 1.8 percent growth in the first quarter of 2017. However, the statistics department warned that this was not the entire story: the economy still grew much faster than in the last three previous quarters combined, and this might have been due to a larger number of smaller projects being sanctioned at the same time.
Red tape, soaring prices for vital inputs and a softening global market have historically meant that economic growth in South Africa is slow and steady, rather than explosive. However, the statistics department has announced that the state of the economy in the first quarter of 2018 is strong.
This is because a significant acceleration in new projects being sanctioned has begun, as well as an increase in the production of goods and services.
More than R1 trillion worth of additional investment has been approved in the first quarter of 2018, compared to the corresponding period last year.
This is strong evidence that the economy is picking up speed and showing signs of resilience after three years of stagnation.
A strong first quarter
The first quarter of 2018 will be remembered as the quarter in which the economy finally began to grow, after a long and painful slump. The first quarter of last year was a very different story, however, with economic activity slowing down significantly. The statistics department reported that the economy grew by only 1.8 percent in the first three months of last year, well below the 3 percent growth rate expected by economists. The main reasons for the disappointing start to the year, according to the statistics department, were an ageing workforce and an increase in supply.
Inflation in South Africa has been relatively low for the past 18 months, and remains well short of the 2 percent target. This is partly due to the effects of the economic crisis in 2011 and the subsequent adjustment, but also because of rising domestic demand. The inflation rate in the first quarter of this year was 1.9 percent, which is close to the RBI’s estimate of sustainable levels.
A growing employment market
The unemployment rate in South Africa is still far higher than it should be, at about 25 percent. The jobs market has been slowly improving in recent years, with the number of jobs being created increasing at a healthy clip. South Africa has one of the best employment rates in the world, and the number of people employed in both the formal sector and the self-employment sector has grown by more than 50 percent in the last decade.
Strong growth of the South African rand
The Rand has been volatile in the past few months, fluctuating between about $1.90 and $2.00. This volatility is mostly due to the fact that the RUR, as the South African currency is known, is still under international sanctions. However, inflation and unemployment rates have trended higher in the last year, and the rand has come under pressure as a result.
People’s money is working
It is difficult to predict how long the current favourable business and economic environment will last. A number of external developments in recent months, including the imposition of new tariffs by the US, have added to concern about the global economic environment.
Stable inflation in South Africa: What’s behind it?
The fact that inflation in South Africa is low partly explains the relatively low levels of inflation in other African countries. South Africa’s central bank, the South African Reserve Bank, started to target inflation in 2006, but due to political pressures it was forced to cut its target down to 1.5 percent in 2011. Since then, inflation has remained well below the target, with the most recent figures showing it at 0.8 percent.
South Africa on track to meet its 2018 budget deficit target
The budget deficit in South Africa is expected to be about 3.3 percent of GDP this year, which is well below the 5.0 percent target set by the South African government. The budget deficit is supposed to be eliminated by 2019–20, which would make this year’s deficit the smallest in history.
The first quarter of 2018 was characterized by strong economic growth, mainly due to the implementation of measures to stimulate demand, including the introduction of a value-added tax (VAT) and the increase in the number of new projects being approved. This growth, coupled with the fact that inflation is low, should allow South Africa to meet its full trade and investment potential as well as to take advantage of the medium-term growth path.