• The South African economy emerged from its first recession in 17 years as marginal GDP growth of 0.9% on a quarter-on-quarter basis was reported in the third quarter of 2009.  Nonetheless, a contraction of around 1.8% is expected for the year as a whole.  The domestic economy is forecast to experience a modest recovery in 2010, with GDP growth of 2.3%, but gaining momentum in subsequent years should the global upturn be sustained. 
   
• Since the economic recovery worldwide has not yet gained a solid footing, businesses should not underestimate the potential of a setback, nor the probability of a protracted sluggish performance. They should continue to focus on curtailing costs, improving efficiencies and maintaining strict cash-flow management, whilst maintaining an ability to respond quickly to increased demand through, for example, appropriate inventory holdings.
   
• Although South Africa’s trade deficit narrowed substantially in 2009 to R25.8 billion (R71.6 billion in 2008), the trend in fact reflected weak economic conditions locally as well as abroad, since imports slowed faster than exports.  The expected gradual recovery of the South African economy during the course of 2010 may, furthermore, prompt an increase in imports on the back of continued investment activity by the public sector and a progressive revival in private sector and household demand, while the export performance could be held back by yet subdued global demand and a strong Rand.
   
• The trade deficit could be reversed on a more sustainable basis by expanding and diversifying South Africa’s industrial base.  For instance, imports consist mainly of capital and intermediate goods and, to a lesser extent, consumer goods.  Local businesses could, therefore, take advantage of public sector infrastructure investment spin-offs by endeavouring to supply several types of intermediary goods and certain capital equipment, thus reducing imports.

• Consumer spending is likely to remain rather subdued as the substantial job losses of 2009 and job insecurity in 2010, along with yet high debt levels, tight credit control measures and low appetite for new debt, weigh heavily on households.  However, the lower interest rate environment should alleviate some pressure on consumers and provide a little support for a gradual recovery in their financial position.  Over the short-term, it is expected that households will take advantage of this window of opportunity to reduce their debt levels rather than embark on a renewed spending spree.


• Fixed investment activity is expected to remain unsatisfactory, especially in the private sector, whilst continued public sector infrastructure spending should underpin the slightly improved growth trajectory in 2010. Nevertheless, a number of large capital expenditure projects associated with the 2010 FIFA World Cup have either been completed or will come to a conclusion during the course of the year.


• China became South Africa’s biggest trading partner last year.  However, hopes of an improved export performance on the back of a strong recovery in China might be dampened by the investment restrictions imposed during the latter part of 2009 and the recent curtailment of bank lending to cool down economic activity.  The Chinese monetary authorities could embark on an earlier and faster tightening approach, which will not only slow down economic activity in that country, but also have potentially adverse implications for exporters to China.  


• Considering the rather sluggish recovery expected in advanced economies, a number of which have been South Africa’s traditional trading partners, the outlook for exports to these markets is perhaps less than promising.  Moreover, a relatively strong Rand, if sustained at overvalued levels, will probably exert pressure on the export-focused segment of the economy, which is already facing fierce global competition in an increasingly challenging trading environment. 


• South African businesses should identify the potentially stronger sources of foreign demand for their products and services, attempting to penetrate non-traditional markets timeously in order to benefit from their rebound.

For the full report, visit the IDC’s website at www.idc.co.za