SUNDAY TIMES - Economy troubles: 'Worst is behind us'
Sunday Times Opinion By Sizwe Nxedlana, 2017-03-12 00:00:00.0

Economy troubles: 'Worst is behind us'

As had been widely expected, GDP figures released on Tuesday were fairly dismal, rounding off a bad year on a downbeat note. Our economy expanded just 0.3% last year, but contracted -0.3% in the final three months.

It was again the primary sector, consisting of agriculture and mining, that held back the economy.

Agricultural output shrank by 7.8% for the year, while mining contracted by 4.7%, shaving a combined 0.6 percentage points off GDP.

The secondary sector - manufacturing, utilities and construction - fared somewhat better, although there was a notable annual decline in the utilities industry, consisting of electricity and water, which contracted by 3.5% compared with 2015. This reflects the impact of the drought and poor mining output on the upstream processing sectors.

The manufacturing and construction sectors both grew at an annual rate of 0.7%, but, combined, the secondary sector added nothing to growth.

It was again up to the tertiary sector to drag overall GDP growth into positive territory. Combined, the sector added 0.9 percentage points to growth. Retail trade and general government services contributed positively to 2016 economic growth.

The biggest contribution came from the finance, real estate and business services sector, which expanded by 1.9% in the year. Retail and wholesale trade grew at 1.2%, showing there is life in the South African consumer yet.

The transport sector grew 0.4%, in line with the sluggish economy. Household consumption grew 2.2% in the fourth quarter, supported by employee compensation, which, on average, remains comfortably ahead of inflation.

The economy's Achilles' heel, a lack of private sector fixed investment, was again clearly evident, contracting by an annualised 1.7% in the last three months of the year. This was the fifth consecutive decline.

Investment is a function of confidence, and business confidence will likely remain depressed until signs of structural reform are apparent.

In last month's budget speech, the finance minister highlighted concerns over the tax buoyancy rate, the relationship between economic growth and tax revenue, which is expected to fall to 0.9% this year. This holds a significant ratings risk should the revenue decline not be reversed, increasing the odds of a VAT hike.

So what solace can we take from the GDP numbers? First, they are three months old. Data for the beginning of 2017, such as the PMI and the leading indicator, points to a much better start to the year. Second, agriculture and mining are set for a considerably better 2017 since the drought has abated and commodity prices recover.

Adding to these tailwinds is a much improved trade balance, which, in 2016, amounted to a deficit of just R3-billion compared with R52-billion in 2015. Rand strength is partly attributable. The stronger currency will help inflation return to the target band.

It seems the worst is behind us: the national income statement is healing, albeit painfully; we expect the economy will grow by 1.1% in 2017. But the expected improvement in growth to between 1% and 2% over the next three years is far from satisfactory. It will not expand employment sufficiently, encourage private sector fixed investment and generate the organic fiscal revenues we need to narrow the deficit.

To achieve this, we need to move beyond the inertia and uncertainty that hamper investment. Unfortunately, the news flow on governance remains uninspiring.

Nxedlana is FNB chief economist