South African Economy Continues to Show Strong Growth

Investment in the manufacturing sector is anticipated to expand at a substantially faster pace, averaging roughly 11% per annum over the period 2007 to 2011

Despite a further moderation in the rate of economic growth in the second quarter of 2007 to 4.5% (4.7% in the first quarter) indications are that the South African economy is still growing at a fast pace. An increase in infrastructure investment activity and continued strong consumer demand are the primary drivers of this strong growth momentum.

At the sectoral level, the construction industry has experienced very robust growth of 14.4% in the second quarter, having benefited from the increased infrastructure activity. This was stimulated by the commencement of construction of new soccer stadiums for the 2010 World Cup, and other major infrastructure projects such the Gautrain rapid rail link. This trend is likely to continue, with fairly robust growth in coming years, anticipated for the construction industry propelled by both public and private sector fixed investment.

By contrast, there has been a further contraction in the mining sector which can be attributed to declining gold production, whilst the iron ore, nickel and coal segments, as well as other non-metallic mineral mining activity, also reported lower production volumes during the second quarter of 2007.

The brisk growth in the construction industry and the ongoing infrastructure development have benefited various sub-sectors of manufacturing that supply building materials and related inputs. The local clothing and textile industry, however, is facing extremely challenging times.


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As one would expect in a climate of rapid economic growth being experienced in the country, business confidence has been at extremely high levels for around three years. High confidence levels are being reported by all major sectors of the South African economy, whilst consumer confidence reached a new all-time high in the first quarter of 2007 despite the recent hike in interest rates and a sharp rise in household debt levels.

Rising confidence levels in the manufacturing sector can be largely attributed to domestic demand conditions, with manufacturers having generally switched their production towards the lucrative local market. The majority of manufacturing sector exporters are still experiencing declining export sales and/or order volumes. Yet a number of sub-sectors have indicated a fairly optimistic export outlook for the next 12 months.

Steel exports were reduced substantially over the past year as steel production was increasingly aimed at meeting the sharp rise in domestic demand. . Sales of carbon steel in the local market increased by 8.5 in the first six months of 2007, compared to a massive 32% decline in export volumes over the same period.  Furthermore, steel imports increased by 85.8% in 2006.

Robust economic growth, accompanied by insufficient investment in new manufacturing production capacity has resulted in the manufacturing sector operating at the highest levels of production capacity in more than three decades. Capacity constraints are being experienced in the cement industry, iron and steel manufacturing, the wood industry, petroleum refineries, as well as in electricity generation. This situation presents investment opportunities for local business enterprises to invest in the expansion of productive capacity to meet rising domestic demand.

The optimistic investment outlook by manufacturers is encouraging. For the first time since 2003, manufacturers have indicated strong intentions to raise investment in additional production capacity over the ensuing twelve month period. It would appear that much of the fixed investment undertaken in recent years was of a replacement nature, thereby not adding significantly to the expansion of the manufacturing sector’s productive base.

Regarding the employment outlook for the next quarter, manufacturers expect a continuation of job creating growth, although at a slower pace than in the last two quarters.

Price pressures at the factory gate are mounting, with a fairly strong upward movement over the past year. Producer price inflation has increased steadily since the final quarter of 2003. A weaker currency and higher prices for imported goods, combined with a widening domestic demand-supply gap, are amongst the contributing factors. Higher producer prices are likely to feed into consumer prices over time, thereby impacting on price stability.


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Overall, conditions in the manufacturing sector improved significantly during the past two years. Investment in additional production capacity should permit strong manufacturing growth over the short to medium term, with manufacturing GDP forecast to rise at an average rate of 5.6% per annum over the next five years. Investment in the sector is anticipated to expand at a substantially faster pace, averaging roughly 11% per annum over the period 2007 to 2011. This has positive implications in terms of labour absorption, but growth in manufacturing sector employment is likely to fall short of the rate forecast for the economy at large (2,6% p.a.).

The inflation environment has deteriorated significantly in recent months on the back of rising fuel and food prices. This has resulted in the CPIX breaching the 6% target range since April 2007, with CPIX measuring 6.5% in July, the highest inflation rate in four years (6.6% in July 2003). On the back of rising inflationary pressures, the Monetary Policy Committee (MPC) raised the repo rate by a further 50 basis points at each of its meetings held in June and August 2007, with the repo rate now standing at 10% and the prime overdraft rate at 13.5%.

Certain recent developments point to a deteriorating inflation environment going forward, including: rising producer inflation; signs of secondary inflationary pressures (as indicated by a sharp rise in core inflation more recently); negotiations for salary and wage increases above the inflation target range (allowing for productivity growth); anticipated higher electricity prices; strong domestic demand as credit growth increases at unabated high levels; a deteriorating trade deficit; as well as increases in some administered prices, such as municipal levies. This could potentially result in a further interest rate hike in the months ahead.

All told, South Africa’s economy is maintaining a solid growth momentum and, as eyes begin to turn to 2010, there appear to be strong grounds for sustained economic growth in the coming years.

This article was prepared by Jorge Maia, Head of the IDC’s Research and Information Department and Gerhard Kuhn, Senior Economist in this Department.