Economic activity was subdued in 2012, with economic growth slowing to 2,5% in 2012, down from 3,5% in 2011. Global economic conditions were again difficult, while locally infrastructure constraints, policy uncertainty, and labour and social unrest all contributed to limited private sector investment and job creation, and therefore broad-based growth was slow.
The world economy was weak in 2012. After some initial improvement in activity in the early part of the year the climate deteriorated as Europe struggled with recession and Chinese growth faltered. Most developed countries continued to suffer from the long-term consequences of the global financial crisis, with impaired banking sectors and massive government debt holding back economic growth. Fiscal austerity in Europe ensured that many economies continued to contract, although a stronger commitment to preserving the euro by the European Central Bank helped reduce borrowing costs in the peripheral countries and therefore the prospects for containing the explosion in government debt. Apart from an unexpected setback late in the year, the US economy performed relatively well, with employment improving and the key housing market starting to revive. However, this was insufficient to help the many developing countries that rely on the large consumer markets in the West.
The primary and secondary sectors of the SA economy continued to be hampered by weak conditions in major trading partners, particularly Europe. Commodity prices also came under pressure for much of the year and mining and manufacturing activity was further hit by unusually high levels of strike action. Regulatory uncertainty and transport and electricity constraints further hurt prospects for recovery. On the expenditure side strong consumption and investment spending by the public sector propped up the economy, while growth in consumer spending and capital formation by the private sector moderated. A strong rise in import volumes partially offset the rise in public spending, while export volumes were stagnant. This resulted in a sharp increase in the deficit on the current account of the balance of payments. This widened to 6,2% of gross domestic product from 3,4% in 2011.
The current account deficit was partially financed by foreign portfolio investors, who continued to buy SA bonds throughout the year. This was despite the downgrades on sovereign debt by two major credit rating agencies. The rand nevertheless was hurt by negative sentiment flowing from the downgrades, the Marikana tragedy and policy uncertainty ahead of the ANC's national conference in December.
Monetary policy remained accommodating. The SA Reserve Bank cut interest rates once more to levels last seen in early 1974, taking advantage of a small lull in inflation in the middle of the year to support growth. Inflation then moved higher, in part due to rand weakness.
The macro environment for the banking sector was generally positive. Low interest rates helped the number of both liquidations and insolvencies to fall, but levels of insolvencies were still relatively high for the stage of the cycle. Bank provisions as a percentage of total assets also remained high. High existing levels of household debt and static employment may provide part of the explanation.
Credit extension to the private sector accelerated towards year-end, with growth in advances rising into double figures for the first time since 2008. Growth in advances to companies was similar to that going to households. Within households personal-loan growth was very strong, but instalment sale and leasing finance also performed well. In contrast, mortgage finance continued to contract in real terms.
The year ahead will probably be similar to 2012. Although there is optimism that global prospects have improved, many economies remain in unchartered territory and obstacles in the form of high debt levels and weak confidence could lead to setbacks on the road to recovery. This is particularly true of Europe, still a key trading partner for SA, where fiscal austerity will impede activity. In the US much will depend on the ability of politicians to navigate an acceptable path to fiscal sustainability. In China there is a declared intention to move away from investment towards a stronger consumer orientation. This could have implications for key commodity prices.
The ability of the global economy to adjust and grow will also impact on capital flows to emerging markets. If efforts to reform are successful, emerging markets should be the beneficiaries of more risk-averse investment strategies. However, this could also lead to a withdrawal of quantitative easing, with unpredictable results. SA's challenge will be to convince investors and rating agencies that the right economic policy choices are being made and implemented that will result in higher, sustained economic growth and employment creation. The recent adoption of the National Development Plan as a national strategy is therefore encouraging, but existing and proposed policies will need to be examined for compatibility. There is now less room for manoeuvre and the right choices are needed to ensure fiscal sustainability and investor confidence.
Even with the right choices economic growth is likely to be below 3%. The main impetus will be investment in public sector infrastructure, but exports will remain under pressure. The consumer will be constrained by rising costs, a lack of employment growth, and modest wage growth that will be more in line with inflation. Although these factors will be partially offset by relatively low debt servicing costs and further recovery in housing, the climate is expected to be relatively tough for households.
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