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The Current State and Short-term Prospects for the Western Cape Economy

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The Current State and Short-term Prospects for the Western Cape Economy

by Cape Gateway
26 Jun 2007
Cape Gateway
Cape Gateway

The Western Cape economy has - in line with the national economy - remained very resilient in the face of higher inflation and interest rates over the past year. Previous expectations of a more constrained growth environment have thus far not materialised.

Western Cape business confidence recovered after the sharp dip during the middle quarters of last year; currently 79% of the BER's regional respondents are satisfied with business conditions, which compares with 80% nationally. The confidence gap compared to national in the regional retail and manufacturing sectors that opened up during the middle quarters of last year has narrowed again.

The revised real GDPR growth statistics indicate that the regional economy expanded by around 6% per annum during 2004/5. According to current estimates, growth came in at 5.5% last year, i.e. slightly faster than the national GDP growth rate of 5%. The services industries (excluding government) continue to power the growth performance, growing by 6.5% per annum on average during 2004/5 and an estimated 6% during 2006. The construction sector is also expanding strongly, growing by a real 12% per annum during 2004/5 and an estimated 15% during 2006.

Overall formal sector employment growth in the province also improved during 2005/6. According to revised Quantec Research data around 50 000 new jobs were created in the province during both years, i.e. an average annual growth rate in employment of 3%. This compares to an average annual contraction of 0.1% in regional formal sector employment over the 2000-4 period. According to the latest Labour Force Survey (LFS) released by Statistics SA, the regional unemployment rate declined to 15% in September 2006 from 18.9% in September 2005 (which was the average over the 2001-5 period). This is more than 10% points lower than the national official unemployment rate of 25.5%; Gauteng has the second lowest regional unemployment rate, namely 23.2%.

While the current economic outlook remains upbeat, the SA Reserve Bank resumed with hiking interest rates at its June 2007 MPC meeting after pausing in February 2007 and further hikes are possible. Current projections show that CPIX inflation will continue to trend slightly above the upper 6% inflation target level over the following 8-10 months. Supply-side shocks (read: higher energy prices, food prices and currency depreciation) have been the primary drivers of higher inflation; however, there is some evidence of broader inflationary pressures developing and the current excessive wage demands do not bode well for inflation going forward. Producer inflation came in at 11.1% in April 2007. Fortunately, inflation expectations are well anchored, which could limit future increases in interest rates. Excluding food and energy prices, CPIX inflation amounted to 4.6% in April 2007.

Nationally real GDP growth is projected to come in at 4.8% during both 2007 and 2008, also accepting that the global economic environment will remain supportive. This bodes well for the regional economic outlook.

The consumer sector has been very resilient in the face of higher inflation and interest rates. Regional consumer confidence increased to a record high during the first quarter of 2007, only slightly below the national record reading of 23 index points. It is clear that households' rating of their financial positions are improving and, combined with favourable expectations regarding the general economy, confidence has been boosted. It is likely that renewed hikes in interest rates will impact negatively; however, income growth on the back of employment creation may continue to underpin consumer spending.

Fixed investment spending is increasingly becoming a growth driver. Regional real fixed investment growth averaged 12.3% per annum over the 2004-6 period. The momentum in the private sector is being augmented by accelerated public sector infrastructure investment. The Provincial Government budgeted for R6.6 billion capital spending over the MTEF period for building and maintaining roads, public transport, social services and administrative infrastructure; the Green Point stadium capital cost is estimated at R2.9 billion; the Cape Town international airport is being expanded at a cost of R1.3 billion; the introduction of the rapid bus transit (RBT) system along the Klipfontein corridor is estimated to cost R300 million; and both Eskom and Transnet are planning expansion of electricity supply and logistics infrastructure in the province - Transnet will spend R3.2 billion on the expansion of Cape Town's container terminal. This planned capital spending will expand the regional economy's longer-term growth potential.

From a sectoral perspective, the region's services industries are expected to continue performing well, with only retail & wholesale and possibly financial services taking somewhat of a dip due to the higher level of interest rates. On the downside, the BER's manufacturing survey continues to reveal evidence of an under-performing regional manufacturing sector.

Considering the outlook for Western Cape economic growth, it is still expected that growth will moderate over the short term due to the impact of higher inflation and interest rates; however, the slowdown may only occur during the second half of 2007 and during 2008 and may be shallower compared to previous forecasts. Regional GDPR growth is projected to soften from 5.7% in 2005/6 and an estimated 5.3% in 2006/7, to 4.9% in 2007/8; thereafter growth is projected to re-accelerate in the run-up to the 2010 World Cup Soccer event to 5.7% (2009/10).

For more information:

Pieter Laubscher
Bureau for Economic Research
083 414 0260

Dave Kaplan
Chief Economist: Department of Economic Development and Tourism
082 563 7052

Issued by:
Communications: Department of Economic Development and Tourism
80 St. George's Mall
Cape Town
Tel: 021 483 9160

SOURCE: Department of Economic Development and Tourism (Provincial Government of the Western Cape)

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