Briefing by Bureau for Economic Research

Meeting report

TRADE & INDUSTRY PORTFOLIO COMMITTEE
6 November 2002
BRIEFING BY BUREAU FOR ECONOMIC RESEARCH

Bureau for Economic Research - Prospect for South African Economy and Manufacturing 2002/3
Bureau for Economic Research PowerPoint Presentation

SUMMARY
The Committee was informed that the domestic real economy performed well during the first half of the year and that the second quarter GDP numbers came in well above expectations, particularly on the expenditure side of the economy. Most of the sub-sectors reported year-on-year increases in domestic sales and that only the printing, furniture and footwear sectors reported declines. For the first time in seven years manufacturers reported net growth in the number of factory workers employed during the third quarter of the year.

MINUTES
Briefing by Prof. Smith from the Bureau for Economic Research
Prof. Smith informed the Committee that he presented to the DTI on a quarterly basis to show where the economy was going. He would be willing to make similar quarterly submissions to the Committee if it was desired.

Prof. Smith informed the Committee that the domestic real economy performed well during the first half of the year and that the second quarter GDP numbers came in well above expectations, particularly on the expenditure side of the economy. The manufacturing sector benefited from import substituting demand in the wake of the rand's sharp depreciation at the end of the year but that the inflation pass-through of the currency depreciation had been substantial. This he said has let to the increase of prime interest rates four times in a row.

Prof. Smith underscored the fact that the current economic outlook was shrouded in much uncertainty and that the economic performances had been disappointing across the globe more so in the USA which was considered a growth leader in recent years. He pointed out that expectations of a strong world economic rebound had petered out and fears of a possible double-dip recession in the USA had increased. He added that the impending war in Iraq and the likelihood of increases in oil prices was an ominous risk to ponder.

Prof. Smith reported that DPIX inflation increased into double-digit in August and that the July year-on-year increase in PPI inflation stood at 15,2% which had not fully filtered to the consumer level. He added that driven by climatic factors, food prices had also re-accelerated and the crude oil prices is hovering around $28billion. On the question of the interest rates, Prof. Smith pointed out that in the recent MPC statement, announcing the fourth interest rate hike this year, the SARB adopted a much more hawkish approach toward fighting the current cost-push driven increase in inflation than was apparent from previous monetary statements.

Prof. Smith informed the Committee that the rand weakened from levels around R10/$ to levels around R10, 60/$ between May and August/September and that this was influenced by increased investor risk aversion and non-residents' selling of domestic securities. On the critical issue of economic growth, Prof. Smith noted that the second quarter of the year witnessed a real GDP growth rate of 3,1% on an annualised basis and that the central aspect of the growth performance is the strong showing of business fixed investment spending. He cautioned, however, that the series of interest rate hikes this year was likely to exert some negative impact and thereby dampen both consumer and businesses' willingness to commit to spending on credit.

Prof. Smith informed the Committee that the previous report showed strong results with manufacturing business confidence index leaping full thirteen index points to a level of 69. He continued that domestic sales and order volumes were much better than expected and it became evident that apart from import-substituting demand, final demand from the retail level also contributed to the improvement. Prof. Smith noted that a compensating factor remained import-substituting demand for local manufacturers and that a significant feature of the latest survey is the further acceleration in domestic sales and order volumes.

Prof. Smith noted that most of the sub-sectors reported year-on-year increases in domestic sales. He explained that sub-sectors revealing the most optimistic expectations over the short term include clothing, chemicals, and furniture, printing, basic metals, textiles and plastics noting that the export optimism is, however, evident in all the other sectors as well. Most sectors reported year-on-year growth in production volumes and that only the printing, furniture and footwear sectors reported declines. He pointed out that for the first time in seven years manufacturers reported net growth in the number of factory workers employed during the third quarter noting that the bottoming-out in the rate of retrenchments in recent quarters has now evolved into a situation of net job growth.

Prof. Smith clarified that the report was based on a questionnaire sent to 1100 manufacturing firms across the country. He reiterated that the world economy was still worrisome but that the South African economy was holding up well. He said this development would ensure that growth rates would remain stable and on an upward trend.

Discussion
Mr. Nefolovhondwe (APO) observed that what had been presented was nothing but figures and statistics. He asked how these figures factor in with people's perceptions that the economy was doing badly. What was the margin of error, if any with regard to the study?

Prof. Smith explained that the survey was undertaken within the strictures of international standards and that the exercise was an ongoing one and that he had no doubt with regards to the accuracy of the presented data.

Mr. Nefolovhondwe noted that despite the fact that China was a closed economy, it registered greater growth rates than South Africa. Was South Africa is in a position to borrow a leaf from China's economic fundamentals?
Prof. Smith replied that South Africa had always, unlike China, relied on the export led economy and that the strength of exports was necessary for boasting the foreign exchange reserves and for employment creation and technology exchange. The way forward for South Africa is to be out-ward oriented and that there was no room to look inward.

Prof. Turok (ANC) noted that the survey was based on big firms and wondered why the small to medium size enterprises was not included.

Prof. Smith replied that quite to the contrary, the survey encompasses all the spectrum of enterprises and that in fact the project picked off with small-scale enterprises.

Prof. Turok noted that the export market seemed to contradict the domestic market and asked how the country was expected to live with this disturbing reality.

Prof. Smith concurred with Prof. Turok that it is a worrisome development that the international prices were putting pressure on domestic inflation and that this incidence impacts negatively on growth factors.

Prof. Turok noted that there was a strong increase in fixed investment and yet the rate at which foreign direct investments are trickling into the country is most disappointing.

Prof. Smith explained that foreign investments follow domestic investments and that where there were positive performance indicators the FDI would flow in. He clarified however that perceptions on issues like the Zimbabwe case could affect these sentiments. He added that the overall situation in the world was not that much positive and that this was one particular worry exercising the wits of policy makers world-wide.

Prof. Turok pointed out that the Committee was interested in policy yet it would appear that this analysis was not policy driven and wondered whether the Department responded immediately to areas of concern that were raised in the report.

The Department explained that the economy was in a restructuring phase and that the reduction of tariffs had given rise to the increase in the traded manufactures. He added that more specialisation has been witnessed and that it is expected that there would be a decline and rise in various sectors. He pointed out that the Department's analysis changes on a regular basis and that this enabled the Department to identify areas that were in need of more efficiency.

The Chair asked if trade agreements contributed to the increase in the exports and the traded manufacturers.

Prof. Smith replied in the affirmative and explained that South Africa has witnessed exponential growth in her export to the rest of the continent and that the opening up of the economy had certainly played a big role in this growth.

Mr. Luckey (ANC) noted that unemployment was the biggest problem facing the country yet several surveys had shown that vehicle production has sharply shot up whilst the number of factory workers has been on the decline. He wanted an explanation for this disturbing contradiction.

Prof. Smith noted that the manufacturing sector had registered some employment growth but hastened to add that an increase in exports did not necessarily guarantee employment. He admitted that he was not in a position to explain what should be done to create more employment opportunities in view of the fact that South Africa has maintained sound economic fundamentals so far. He submitted that if the private sector was slow to pick up, then the onus was on the government to intervene with the necessary incentives to spur domestic investment.

The meeting was adjourned.