South Africa: Year in Review 2011

Having posted mixed results in 2011, South Africa’s economy was buoyed by rising demand for commodities and solid growth at home, while continued high unemployment, concerns over the European debt crisis and a slowdown in many of the country’s main trading markets saw a pessimistic close to the year.

South Africa’s economy underperformed in some key indicators in 2011, coming under pressure as the rand underwent a devaluation that pushed up the costs of imports and flowed through into higher inflation. Meanwhile, growing uncertainty in overseas markets weakened demand for some core exports. Though final figures have yet to be issued, the country’s GDP is believed to have risen by around 3.2% in 2011, somewhat down on expectations earlier in the year.

With much of the global economy slowing, and with the eurozone debt crisis threatening to spread, South Africa’s GDP may post only modest growth in 2012, with expansion forecasts in the range of 2.5-3%. In a note released in late December, Bank of America Merrill Lynch warned that delays to government investment in infrastructure, a further weakening of exports and softer domestic spending by consumers and the private sector could all combine to slow the pace of growth.

Many countries would welcome growth of 3% or more, but that figure falls well short of the 7% set by Finance Minister Pravin Gordhan as the rate of expansion required to create the employment and income needed to bring prosperity to all South Africans. While there was some downward movement in the jobless numbers late in 2011, the unemployment rate remains at around 25% – even higher among the young black segment of society.

Anything less than 7% GDP growth will not deliver the momentum to broaden the base of the economy enough to drain the jobless pool and create new opportunities for those entering the workforce. It is unlikely that 2012 will provide that momentum, though the projected GDP rate will at least promote some employment growth.

Some of that expansion is expected to come through higher exports to fellow African nations, continuing a trend that has been developing over the past few years. Exports of manufactured goods to African clients rose in 2011 to 27% of the year’s total, just short of the 29% shipped to Europe and well up on the 22% exported to Asia. With much of Europe seemingly headed towards a recession, an increasingly diverse export trade will help protect South Africa from the impact of a downturn in some of its traditional markets.

The cause of exporters was also helped in 2011 by the fall in the rand: the currency shrank by 19% across the year, with 15% of that decline coming during the four months leading up to the end of December. This drop made the rand the third-worst performing currency in the world, behind only the Argentine peso and the Indian rupee.

Importers have felt the pinch, however, with the pressure being reflected in price rises across a number of goods and materials. Inflation edged upwards in the latter part of 2011, a trend that many analysts believe will continue into 2012. In mid-December, Statistics South Africa released inflation data for the previous month, showing that the consumer price index had hit 6.1% year-on-year, above the target ceiling set by the reserve bank at the beginning of 2011 and its highest level for 22 months. By contrast, wholesale inflation fell back in November, easing to 10.1% from 10.6% in October, the first decrease in seven months.

Though this is not good news for either consumers or producers, it is unlikely that the relatively high rate of inflation will prompt the South Africa Reserve Bank to raise its key interest rates in the near future. Throughout 2011 the bank held its benchmark lending rate at 5.5%, its lowest level in 30 years. However, with the pace of GDP expansion slowing, the reserve is widely expected to leave rates as they stand for much of 2012.

These concerns, as well as a steady increase in public debt to around 30% of GDP by the end of 2011, prompted ratings agency Moody’s to downgrade the outlook on South Africa’s A3 rating to negative in November. With the likelihood of a further slowing of the economy, and with the government committed to increased spending on infrastructure and job creation programmes in 2012 and beyond, it is probable that public debt levels will expand this year.

South African stocks finished 2011 in negative territory, with the Johannesburg Stock Exchange closing at 28,600 points, fractionally down on the 28,639 final trading figure for 2010. The retreat came as investors became more cautious over the situation in Europe and followed a move out of gold and into dollars, a trend that hit the share price of many of the country’s leading mining firms.

South Africa’s focus in 2012 will be on how Europe deals with its debt problems and how deeply these issues will impact the global economy. Closer to home, eyes will be on whether local demand and the government’s programme to bolster the ageing infrastructure can help sustain growth.