Overview

The economic climate was exceptionally tough during most of 2009. The financial crisis and the worst global recession in the post-Second World War era hurt exports badly and resulted in significant job losses at a time when the domestic economy had already started to slow in response to high interest rates and elevated household debt levels. However, in line with many other countries, the economy bounced back in the second half of the year, although activity levels remained depressed.

The massive deterioration in the global economy in late 2008 and early 2009 followed by the recovery in the second half of the year overrode domestic determinants in 2009. Although South Africa was relatively fortunate given sound public finances, an advanced infrastructure programme and a largely unaffected banking sector, the global downturn hit primary and secondary activity particularly badly. Manufacturing contracted in the first half of the year as demand from key trading partners dried up. Sectors such as motor vehicles, steel and chemicals all experienced sudden slowdowns. Firms were forced to lay off workers or reduce working hours in order to maintain long-term viability. Fortunately, policyinduced recoveries in key developed and developing economies ensured that the downturn was relatively short-lived. By May manufacturing activity was already starting to recover and the upswing had gained some momentum by the final quarter of the year.

South Africa experienced its first consumer recession since the early 1990s, starting in the middle of 2008 and deepening in 2009. Households were already under pressure before the onset of the global crisis, hampered by high interest rates and debt levels. Rising unemployment then hurt disposable incomes and weakened consumer demand further. From the peak in employment in the final quarter of 2008 to the trough in the third quarter of 2009 numbers employed fell by 6,9%. Fortunately there were early signs towards the end of the year that these negative trends had started to reverse. Employment grew marginally in the fourth quarter and retail spending started to pick up, albeit modestly and from depressed levels.

Capital formation continued to grow in 2009, bolstered by massive spending on transport and energy infrastructure. However, the rate of growth slowed markedly, partly because of the high base established over the past six years, but mainly because of a contraction in private sector capital spending. The private sector cut back investment plans and spending following the dramatic change in local and global circumstances in late 2008.

Balance of payments developments were generally favourable. Although exports were well below the previous year’s levels, imports fell at a faster pace, resulting in a substantial narrowing in the trade deficit. Positive terms of trade effects, with export prices outpacing import prices, also reinforced volume changes. Trends in the capital account were also favourable. In contrast to 2008, positive balances on the financial account expanded as 2009 progressed, helped by large foreign purchases of SA securities as risk aversion lifted and enthusiasm over developing economy prospects grew.

Inflation fell as food and energy prices moderated from the peaks in 2008. The combination of a better inflation outlook and very weak economic activity led to sharp cuts in interest rates. The Reserve Bank added 450 basis points to the 50-basis-point cut in December 2008, taking the key repurchase rate from a peak of 12% to 7% by August. Prime lending rates fell from 15,5% to 10,5%, coincidentally the same as the 2005 low experienced in the previous cycle.

Growth in credit extension to the private sector continued to fall throughout the year and ended the year in negative territory, the first such contraction since the mid-1960s. Credit normally responds with a lag to real economic activity as well as interest rate moves. This cycle has been exaggerated by the severity and nature of the downswing.

Outlook

The economic climate should continue to improve in 2010, helped by relatively low interest rates, slowly rising employment, infrastructure spending and the positive effects emanating from the hosting of the 2010 FIFA World Cup. However, the global and local environment remains fragile, with strong headwinds on medium-term growth prospects. Credit markets are likely to remain impaired given the prospects of tighter regulatory standards and the effect of the recent negative history on financial models. Governments will have to cut back after the largesse of 2008 that has left public debt at unprecedented levels, and central banks will also start to remove excessive liquidity in the system.