We need to roll up our sleeves and make stuff

14 August 2016 - 02:00 By Sizwe Nxedlana

Domestic economic growth has been persistently weak and the outlook is not much better. In fact, based on our medium-term forecasts, the five-year period to 2019 is shaping up to be the second weakest half decade since the end of World War 2. However, beneath the weak-growth environment a silver lining is taking shape.The trade balance is improving and this bodes well for the reduction in our key macro vulnerability: the wide current-account deficit.This long-awaited adjustment is being led by import compression. The improvement in rand export prices is also beginning to help - however, export volumes remain disappointing.story_article_left1The nation's chief financial officer - that is, the Reserve Bank and Treasury - has imposed belt-tightening discipline. We are spending and importing less, and on a path to living within our means. But we are failing to invest, produce or export more, making the process more painful than it should be. In short, this economy is like a boxer boxing with one hand.Import compression can be attributed to the drop in the oil price, weak domestic expenditure and, troublingly, a slowdown in infrastructure spending by the government and the private sector. Crude oil accounts for almost 20% of our import bill, and oil prices have dropped from $100 a barrel two years ago to just above $40 a barrel now. Weak consumer spending points to further weakening of imports in the months ahead.Export growth has been largely driven by the recovery in international commodity prices and a weaker rand. Although the rand has strengthened it remains weak on a historic basis. For such a volatile currency it is helpful to look at averages - the rand's annual averages against the dollar for the past two years were R10.85 and R12.77 respectively. The inflation-adjusted, trade-weighted rand was approximately 35% weaker in July 2016 than in January 2015.The point is the rand, despite the welcome recent strength, remains weak by historic standards. This weakness should be supportive of a narrowing of the current account.What is concerning, however, is the persistent underperformance of export volumes. Exports have maintained a weakening bias since 2013 and have contracted for the last three quarters. The underperformance is not entirely surprising given the strikes in the mining and manufacturing sectors, which brought the production side of the economy to a near standstill. The subsequent decline in commodity prices during the second half of 2014 exacerbated production declines.story_article_right2But there is evidence conditions are beginning to improve. Stats SA data hints at a rebound in manufacturing production in the second quarter of 2016, following a rather dismal first quarter. The Barclays PMI also points to a sustained improvement in the manufacturing sector in the months ahead. In fact, the sector continues to add jobs while other input costs have steadily declined.Signs that the rand's weakness is finally incentivising export growth are appearing. The diversification of South Africa's export partners also has the potential to drive exports.The share of South African exports destined for elsewhere in Africa has increased notably. In 2010, 25.7% of South African exports were destined for Africa - this share has grown to around 30%. Trade agreements may be facilitating this growth, but the increase is also due to limited manufacturing capacity in many African economies.Continued efforts to boost industry and power generation will favour export growth, but sustained growth in export efforts will require more investment in productive capabilities. That should be the national public policy priority.Nxedlana is FNB's chief economist..

There’s never been a more important time to support independent media.

From World War 1 to present-day cosmopolitan South Africa and beyond, the Sunday Times has been a pillar in covering the stories that matter to you.

For just R80 you can become a premium member (digital access) and support a publication that has played an important political and social role in South Africa for over a century of Sundays. You can cancel anytime.

Already subscribed? Sign in below.



Questions or problems? Email helpdesk@timeslive.co.za or call 0860 52 52 00.