SA economy booming: Allan Gray

According to Allan Gray, the South African economy is growing more strongly than official statistics recognise. “In fact, with the exception of certain industries such as agriculture and mining, most sectors of the economy are reporting the strongest sales and profitability in 25 years,” says director Sandy McGregor, the firm’s economist.

The picture painted by Statistics South Africa is one of an improving but not a booming economy. McGregor warns that “if you judge South African through the prism of the official GDP numbers you’ll miss a great success story.”

McGregor says that tax collections and VAT in particular give a good indication of what is actually happening in the economy as a whole. The official GDP growth rate for the year to June 2005 is 4.6% after inflation, or 9.1% including inflation. However, VAT collections for the period April to July 2005 increased by 15.6% over the same period in 2004 and personal income tax was up 15.2% despite tax relief in the 2005 budget.

He also points out that sector specific data is also generally buoyant. Vehicle sales were up 19.5% in the year to October 2005 and cement sales were up 11.8%. Retailers are typically reporting strong sales growth and government spending is up 12.2%.

Some of the increased spending has been met by imports. In the year to March 2005 South Africa’s current account deficit as a percentage of GDP increased by 2%.

“However, this implies that if spending is growing at, say, 15%, 13% of the increase is being met by domestic suppliers and output must have increased accordingly.”

The economy is growing much faster than the official statistics suggest. “Indeed, this has been the case for a number of years as evidenced by the fact that VAT collections expressed in real terms, while volatile, have been on a rising trend since 1999.”

McGregor says that among the buoyant sectors are building and construction, particularly house building and renovations, telecommunications, banking, motor vehicles and retailing. Domestic manufacturing has suffered from a lack of competitiveness due to the strong Rand but is being pulled up by strong demand.

Why is South Africa booming? According to McGregor there are two broad reasons. Firstly, commodity prices are high which has boosted the value if not the volumes of our exports. Secondly the process of eliminating inflation and opening the economy to competition, thereby allowing interest rates to fall, is starting to pay dividends. “The GEAR policy of the mid 1990’s is delivering,” he says.

McGregor even questions whether SA, given the skills shortage, can grow faster than it is. Yet there is continual discussion about how to accelerate growth. Some proposals – such as increasing infrastructure investment – are essential if the current momentum is to be maintained.

“Ultimately the large and growing trade deficit will cause the Rand to depreciate, which could increase the cost of living and slow down retail sales.

'The debate on future economic policy should take as its starting point the fact that the economy is already growing very strongly,” he concludes.