The SA economy is at a crossroads. The way forward depends on whether the world economy can pick up during the second half of the year or the domestic market can make up for the lack of international growth.
Exceptionally high levels of uncertainty still dog the international and domestic environment . The multilateral institutions, the IMF, OECD and World Bank, have all downgraded their world growth forecasts this year to no higher than 3%.
As usual, the US economy was expected to lead the world economy out of stagnation, but recent economic statistics show that US unemployment is at a six-year high, the consumer remains severely indebted and much of the corporate sector is still squirming under the microscope of shareholder activism and regulatory scrutiny.
The world's biggest economy is pinning its hopes on highly expansionary fiscal and monetary policy putting it back on track. Interest rates are at the lowest level that this generation of Americans has seen, government is spending billions on war and reconstruction, and there are huge tax cuts in the pipeline. These policy stimulants may serve as an economic backstop and help the US turn the corner later this year, narrowly avoiding recession, but with geopolitical uncertainty unlikely to go away soon, they may also turn out to be straws in the wind.
Elsewhere in the developed world the economic picture is even bleaker. In contrast to the US, the EU has no intention of using expansionary policy to boost growth. Interest rates are still relatively high and unlikely to fall by more than a percentage point or two.
In the East, Japan is still trying to manage its way out of a policy quagmire in which it has been stuck for more than a decade and this year growth is again expected to be borderline. China, the last hope for world trade this year, and the broader Asian region will have to recover from the economic disruption and setback of the severe acute respiratory syndrome (Sars) pandemic.
SA thus cannot rely on buoyant world demand for its exports and will probably have to turn inwards if it wants to sustain the economic growth rates it has achieved in the past few years.
At the turn of the century, the economy left behind the lacklustre annual growth of about 1% and stepped up the pace to annual increases in gross domestic product of more than 3%. But this growth was stimulated by the export sector's contribution, which has steadily increased from 25,7% of GDP in 1999 to 34% last year.
That export drive, and the resultant pressure to become more competitive in an international context, boosted the manufacturing sector's performance.
Increased international competitiveness also helped SA achieve cracking productivity gains of more than 4%/quarter in both 2000 and 2001. More recently, the manufacturing sector's labour productivity increased impressively from 4,5% in the first quarter of 2002 to 6,7% in the third quarter. These gains in productivity and moderate wage demands last year meant the growth in manufacturing labour costs declined during the first half of last year.
SA's globalisation has also helped on the job front. Figures released by Statistics SA show that the rate of unemployment stabilised late last year and, in some sectors, companies took on new jobs after economy-wide job cuts since the new government took power in 1994.
More recently, however, the rand's dizzying appreciation since early 2002 has threatened to undermine the substantial progress that has been made on the economic front.
The trade balance has already started to shrink because of a slowdown in exports and Investec's purchasing managers index has sunk below 50 - territory that signals a contracting manufacturing sector - for the first time since it was compiled. Investec Asset Management's head of fixed income, André Roux, says: "Below the critical level of 50, it is consistent with a sharp contraction in manufacturing activity between March and April."
The rand's 50%-plus gain in value against the dollar compared with last year, on top of slack world growth, has already taken the oomph out of the export sector. Latest trade statistics show exports beginning to slow. Companies that compete with imports are also likely to be affected.
The mining sector, which experienced little growth last year, is being put under further pressure by the rand because the prices for its products are set internationally and the currency's strength has undercut its rand-based revenues. The gold mining industry, in particular, has not benefited fully from the precious metal's renewed status as a safe haven. Though the dollar gold price has broken above the US$300/oz level and has settled closer to $350/oz, the rand gold price is lower than when the precious metal's value was in the doldrums.
The most worrying element of the purchasing managers index figures is that they also signal a reduction in jobs, a reversal of an uptrend in the employment index since 2001. "Manufacturers are probably being forced to go beyond a job freeze to retrenching staff in an effort to cut costs in the face of weaker sales and the pressure on export margins," says Roux.
It's painfully evident that unless the authorities and the private sector react swiftly to the change of events, SA's growth phase will run out of steam quickly. Companies will have to source more of their growth internally than they have in the past few years because world trade is unlikely to boom again for the next few years.
Fortunately the consumer is in better shape than at any other time over the past 10 years. Despite high interest rates, household debt as a percentage of disposable income is approaching the 50% mark, from more than 60% in the late 1990s.
But authorities need to resolve the policy conflict that is pulling consumers in different directions. Fiscal policy has become more expansionary for the past two years, putting extra money in the pockets of all taxpayers at the end of every month, while the Reserve Bank has so far sustained the pressure on the monetary front by keeping interest rates up to bring inflation back into the target range of 3%-6%.
Reserve Bank governor Tito Mboweni has indicated he will remain vigilant in the fight against inflation but, importantly, is also keeping an eye on growth. The high interest rates have not yet sucked the life out of the consumer sector.
Real household consumer expenditure is still buoyant, off the high growth rates of late 2001 and the first half of 2002.
But there has been a drop in spending on durable and semidurable goods and this will need to be stimulated again if SA is to rely on the home market to sustain growth of 3% and upwards.
