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According to the World Bank, South Africa’s gross domestic product is worth $277 billion – 0.45% of the world economyWhile the recent Budget Speech and State of the Nation Address have had South Africans focus inward on their economic outlook, an awareness of our economic health in the context of international markets remains critical in an interconnected global economy.
With the developed world eyeing the possibilities lying in the BRICS countries (Brazil, Russia, India, China and South Africa), given their status for likely higher return on investments in the coming years, the competition between these countries is likely to intensify.
Over the next 50 years, Goldman Sachs expects Brazil, Russia, India and China possibly to become “a much larger force in the world economy”, with numerous in-depth studies by the investments giant exploring the opportunities that exist in the coming decades.
Although South Africa does not feature always in the BRIC analysis, last year’s Standard Bank Africa Forum held at the Cape Town International Convention Centre saw more economists and analysts incorporating South Africa into their assessments (hence, BRICS).
Here, gross domestic product expanded at an annual rate of 1.50% in the last quarter. According to the World Bank, South Africa’s GDP is worth $277 billion – 0.45% of the world’s economy.
After several years of robust economic growth of around 5%, growth dropped to 3.1% in 2008 as the global slowdown emerged. Severe energy shortages, slowing domestic consumption and the worsening world recession adversely affected economic activity corresponding to the decline.
By contrast, the GDP in Brazil, a fellow BRIC country with which most economists draw numerous similarities, neither contracted nor expanded in the last quarter – registering 0.00%.
Brazil’s GDP of $1 613bn constitutes 2.60% of the world’s economy, according to the World Bank.
The country has a significantly higher stake in the world’s share of goods and services, although both South Africa and Brazil have advantages on which they can capitalise.
Brazil remains one of the fastest growing emerging economies in the world, particularly given its growing agricultural, mining, manufacturing and service sectors. As expected, its economy ranks as the highest among all the South American countries, holding a strong position in the global economy.
Despite a lower growth rate than South Africa during the last quarter, strong domestic demand will fuel economic growth in Brazil this year and likely will increase inflation expectations for 2011, according to economist, Dr Nouriel Roubini.
He adds that Brazil will be more dependent on external financing, and hence more vulnerable to sudden changes in risk appetite and global liquidity conditions.
Roubini, who addressed the Standard Bank Africa Forum, has had his organisation, Roubini Global Economics (RGE), conduct extensive research into South Africa in the context of the BRICS analysis.
RGE expects South Africa to record a sluggish 2.5% recovery in 2010, according to its first quarter estimates, after falling into a recession (2% negative growth) last year.
“Sustainable growth recovery requires a pickup in domestic demand, yet South Africa seems likely to continue to rely on external demand,” the report noted.
“With a relatively high interest rate and a central bank averse to FX intervention, the rand was an attractive option in the global carry trade, returning to its 2008 highs. Any unwinding of such trades poses a risk to the fragile recovery in 2010.
“Moreover, as South Africa addresses its chronic high unemployment level, its fiscal position will deteriorate.
“Other potential red flags include the widening current account gap and higher electricity prices as the country faces an anaemic recovery,” the report added.
As the biggest economic player in the world, second only to the United States, China is expanding at an annual rate of 10.7% in the last quarter. Its GDP is worth $4 326bn, a notable 6.98% of the world economy, according to assessments by the World Bank. This makes the country’s economy 14 times larger than that of South Africa.
Over the past three decades, China’s economy shifted from a centrally planned system, effectively closed to international trade, to a more market-oriented economic model with a rapidly growing private sector.
In Capitalism with Chinese Characteristics: Entrepreneurship and the State (2008), Yasheng Huang argues that China’s economic take-off in the 1980s was fuelled by private entrepreneurship, which was facilitated by micro-economic flexibility, access to capital, and enhanced property protections.
His advice for the other BRICS countries likely would follow the lines of China’s reforms.
Subsequently, supporting this rapid economic growth has been a vibrant export orientation on the part of the Chinese government.
The Chinese economy returned swiftly to steady health after the global downturn at a pace better than any other large economy. The Economist attributes the “bounce back” largely to its enormous monetary and fiscal stimulus.
While South Africa’s property market is projected to have an upswing and already has shown good signs of recovery, Chinese developments are forging ahead. Prices of new apartments in Beijing and Shanghai jumped by 50%-60% last year.
As noted by The Economist, “Luxurious projects have much in common with those in Dubai – notably ‘The World’, a luxury development in Tianjin, 120km (75 miles) from Beijing.”
As another emerging and recognised player in the world’s markets, India expanded at an annual rate of 7.20% in the last quarter, lower than that of China but significantly higher than South Africa and Brazil.
India has not been without its absence of a deep entrepreneurial impulse that has fuelled its growth.
Its GDP is worth $1 217bn or 1.96% of the world’s economy, according to the World Bank’s studies.
The country’s diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services.
Services are the major source of economic growth, accounting for more than half of India’s output with less than one-third of its labour force, according to online research by Trading Economics.
The economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points.
The International Monetary Fund’s (IMF) growth forecast for India in GDP in its “World Economic Outlook Report” pegged the country’s economic expansion at 7.8% in 2011, up from the 0.5% projected in the previous outlook.
Already in the first quarter of this year, a revival of domestic demand, capital inflows, and fiscal and monetary measures will help India return to potential growth in 2010, according to RGE.
“Attractive real estate, equities and infrastructure will boost foreign investment, but cause asset bubbles and overheating, prompting regulatory and monetary tightening.”
RGE adds that inflation, a high fiscal deficit, supply-side constraints and slow reforms will concern investors, constraining India from attaining 9.0% growth in the near term.
Russia’s GDP contracted by 8.90% over the last four quarters, and is worth $1 608bn or 2.59% of the world economy, slightly below Brazil’s share, according to the World Bank.
The Russian economy is driven by commodities. Payments from the fuel and energy sector in the form of customs duties and taxes accounted for nearly half of the federal budget’s revenues, according to Trading Economics.
However, some analysts have posited concern over Russia. The American Enterprise Institute’s Leon Aron believes the uptick in world oil prices “saved Russia from a full-scale depression”. He adds that “second-quarter economic performance numbers released in late July show no respite from crisis, with GDP contracting at an annual 10.9% rate, the sharpest decline on record.”
During the past decade, on the whole, poverty and unemployment declined steadily, while the middle class expanded significantly.
While some countries are projected to struggle in recovery and growth, South Africa is likely to remain subdued in the early months. “There is a good chance that economic growth could be surprisingly solid”, with South Africa ending 2010 with annual GDP growth of over 3%, according to predictions by Old Mutual’s chief economist, Rian Le Roux.
He believes “the combination of a recovery in consumer demand, ongoing robust public sector spending, an end to the cycle of destocking, moderate export gains and the 2010 Fifa World Cup, could combine to generate a surprisingly robust acceleration in growth during the middle quarters of 2010”.
“We could even see another interest rate cut from the Reserve Bank, adding to the positive conditions, should inflation surprise on the downside and the rand remain strong,” he added.
On this positive note, “South Africa will benefit from revivals in both the developed and emerging markets, particularly China, helping underpin export volumes and prices of its commodity exports,” according to First National Bank’s SA Good News.
Not only will this help the trade deficit, which Le Roux predicts should stay steady at around 4.5% of GDP this year, but the country also should continue to attract foreign capital inflows, so that the rand depreciates only moderately against the US dollar over the year.
Garreth Bloor
