Overview of recent economic trends in South Africa and the Northern Cape Day Month Year Investment breakfast with the Northern Cape Chamber of Commerce and Industry Kimberley, 9 November 2007 Jorge Maia Head: Research & Information Department

Global economic conditions The global economy continued to expand strongly in the first half of China’s economy gained further momentum, with GDP growth of 11.5% in the first half of Combined, China, India, Brazil and Russia contributed around half of global economic growth over the past year. Robust economic growth was also reported in many other emerging markets Africa is currently experiencing its strongest growth and lowest inflation in over 30 years. Growth in sub-Saharan Africa is estimated at 6% in 2007 and rising to 6.8% in Robust global growth is forecast, averaging approximately 5% p.a. over the next five years. Growth outlook for the US in 2007 is scaled down further to 1.9%, compared to strong growth of 3% in Advanced economies = 52.3% of World GDP Developing economies = 47.7% of World GDP

Global economic conditions Trends in the US economy had a major influence on global growth in the past as indicated by the way in which a recession in the world’s largest economy was reflected in an overall global slowdown. More recently, however, the influence of the US economy seems to be less significant in light of strong growth in emerging economies such as China, India, Brazil and Russia. Influence of US economy on global growth less significant than in the past.

Global economic conditions: US economy Domestic demand, and more specifically consumer spending, has been the main driver behind GDP growth in the US economy, but an improved export performance is supporting growth more recently. Improved export performance in light of a weaker dollar

Global economic conditions: Risks factors Due to turbulent global financial conditions, world growth has been revised downwards. Although overall global growth is still fairly robust, downside risks have risen. Deteriorating financial market conditions emanate from the mortgage crisis in the US housing market. US and European markets mostly affected, but the impact is extending much wider due to linkages across global financial systems. Domestic demand in the US is expected to be curtailed due to tighter credit control. Western Europe has been directly affected by the US sub-prime crisis through the involvement of a number its banks in the US housing sector. Rising oil, metal and food prices remain of concern on the inflationary front. Situation has deteriorated since the release of the WEO report

SA economy has posted a solid growth performance in recent years, mainly due to strong domestic demand (exports and imports remained a drag on what could have been an even better growth performance). South Africa’s economic performance: GDP and investment growth

Solid growth performance of the SA economy continued throughout 2006, with some moderation in the first half of Construction sector reported the strongest growth, underpinned by increased building construction activity and high levels of fixed investment across most economic sectors. The strong consumer boom was reflected in high growth rates in the trade and financial service sectors. The brisk growth in the manufacturing sector was mainly due to strong domestic demand as exporters faced a challenging global trading environment. Mining activity has been adversely affected by a continued decline in gold production, although partially offset by the excellent performance of the platinum sub-sector. South Africa’s economic performance: Sectoral growth

Rapid increase in fixed investment activity in the manufacturing sector recorded since Most of the investment was of a replacement nature, thereby not expanding significantly the productive capacity of the manufacturing sector. However, for the first time since 2003, manufacturers indicated in Q1 of 2007 a substantially improved outlook for investments in additional production capacity. New investment is being mainly driven by the lucrative domestic market. South Africa’s economic performance: Investment in manufacturing

Supply constraints are being experienced in various sub-sectors of manufacturing. This has been reflected in a widening domestic demand-supply gap, with the shortfall being imported. Capacity utilisation in the manufacturing sector stands at a 35-year high. However, current investment levels are not rising to the occasion. South Africa’s economic performance: Investment in manufacturing

The sharp increase in domestic demand, including consumer spending and fixed investment, resulted in a widening output gap. Situation has also been aggravated by production capacity constraints experienced in various sectors of our economy. This is illustrating that SA is consuming increasingly more than it is able to produce Hence, a rapid rise in import demand for both consumer and capital goods has emerged. South Africa’s economic performance: Domestic demand vs supply trends

Strong rise in import levels associated with fixed investment activity and domestic consumption. Trade deficit measured R55.1 billion in the first 9 months of 2007, compared to a deficit of R42.5 billion over the same period in Strong import demand over the Jan. to Sept. 2007: – Imports of base metals and metal products increased by 49% – Transport equipment imports (incl. vehicles) increased by 34% – Imports of mineral products (oil and fuel) up by 40% – Machinery and equipment imports up 24% – Prepared food products, beverages and tobacco imports up by 41% China is becoming a progressively larger source of imports, with its share in the import basket rising from 1.7% in 1994 to just over 10% last year. South Africa’s economic performance: Imports SA imports by country of origin in 2006 South America 3.7% SADC 3.3% Other 19.6% Taiwan 1.7% India 2.3% South-eastern Asia: 5.2% South Korea 2.6% Japan 6.7% China 10.1% European Union 35.1% Australia 2.1% United States 7.6% Source: SARS

SA’s exports are destined mainly to the EU, followed by Japan and the US (combined 54% share of exports in 2006). The SADC region also accounts for a significant share of SA’s exports. Considerable headway has been made in the diversification of the export basket over the past decade. SA’s export propensity (i.e. exports-to-GDP ratio) increased sharply from 22% in 1994 to 33% by 2002, but declined thereafter as a strengthening rand took its toll on the price competitiveness of export-oriented business enterprises. The exports-to-GDP ratio stood at 32.6% in Q South Africa’s economic performance: Exports

Exports of manufactured goods remain under pressure due to a fairly strong currency. A widening trade deficit emerged since 2004 as domestic demand exceeded domestic supply by an increasing margin. This has been accompanied by a persistently large deficit on the services account (payments of income and dividends to non-residents). South Africa’s economic performance: Balance of payments

Since 2004, roughly 1.4 million new jobs have been created in both the formal and informal sectors. The majority of jobs have been created in the services-oriented sectors economy (trade, financial and business services as well as in construction). Despite this welcomed improvement, unemployment remains unacceptably high (25.5% in March 2007, or 4.3 million unemployed people). The challenge is to elevate the current high rates of GDP growth and to broaden the developmental impact thereof. South Africa’s economic performance: Employment

Northern Cape Province: Economic growth Economic growth in the Northern Cape averaged 2.0% p.a. over the period 2000 to 2005, compared to the national average of 3.9% p.a. Sharp contractions in mining production, the trade sector and transport services contributed to the negative growth performance recorded in 2001.

Northern Cape Province: Structure of the economy

Northern Cape Province: Relative importance of sectors from a national perspective The Northern Cape’s agricultural sector, as well as its mining & quarrying sector, make above average contributions to overall sectoral output from a national perspective. Contribution by the Northern Cape to SA GDP = 2.2%

Northern Cape Province: Sectoral growth Above average growth has been recorded by the following sectors (relative to the provincial average over the period ): – Trade & accommodation – Transport & communication – Other services – Financial services Relatively high growth rates were recorded more recently in construction, financial services, retail & wholesale trade, as well as in transport services.

Although SA’s economic growth is likely to moderate to 4.5% in 2008, the outlook remains positive, with growth expected to average 5% p.a. over the next five years. Fixed investment is forecast to expand rapidly by 10% p.a., with the investment-to-GDP ratio expected to measure 25% by South Africa’s growth prospects

A substantial improvement in overall economic activity is forecast for the manufacturing sector, which will benefit from strong domestic demand and fairly strong global economic growth. The construction sector will expand rapidly due to increased activity linked to the public and private sector investment plans. The transport and electricity sectors are also likely to expand faster than the national average. South Africa’s growth prospects: Gross domestic product SA economy average

Fixed investment in manufacturing is set to increase rapidly over the next 5 years, as many sub-sectors are operating close to, or at full capacity. Government’s multi-billion rand spending on public infrastructure over the next 5 years, the SOE capex programme, the 2010 World Cup and Gautrain will all provide a major stimulus to fixed investment. SA economy average South Africa’s growth prospects: Investment activity

Planned private sector fixed investment activity includes: Manufacturing sector  Iron and steel industry  Base metals  Cement industry  Automotive industry Mining industry, 28 new projects (R27 billion)  Platinum mining  Coal mining  Gold mining Property development  Real estate  Hotels and flats  Shopping centres  Office blocks

South Africa is currently enjoying the longest sustained period of economic growth on record (95 consecutive months). SA is partaking in many of the challenges of the globalisation process, facing an increasingly competitive environment that calls for:  productivity growth  lower production costs  technological innovation  capital deepening and job losses in many instances  as well as the identification of increasingly difficult to find niches in the marketplace. Competitive forces pose opportunities for technological upgrading, innovation, expansion (economies of scale), global joint ventures or partnerships, and identification of niche markets and sectors. Concluding remarks

SA’s general economic stability and sound macro-economic management and fundamentals are widely acknowledged. The inflation environment has deteriorated more recently on the back of a sharp rise in food and fuel prices, thereby resulting in rising interest rates. A developmental approach to fiscal expenditure going forward. The rand is likely to come under pressure. Business and consumer confidence levels dipped to some extent from their all-time highs. The efficiency and affordability of physical support infrastructure are critical to economic efficiencies. Skills shortages are developing in a variety of sectors, posing major constraints on the country’s development and growth potential. The resolution of the unemployment crisis is key to alleviating many of South Africa’s ills. Global competitive forces have played their role in this regard, but domestic factors should not be downplayed. South Africa has a substantial range of comparative advantages that, if fully exploited, would lead to a higher growth trajectory.

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