SOUTH AFRICA ECONOMIC NEWSLETTER

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E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
August 26 2005 ISSUE


1. Summary. Each week, AmEmbassy Pretoria publishes an
economic newsletter based on South African press reports.
Comments and analysis do not necessarily reflect the
opinion of the U.S. Government. Topics of this week's
newsletter are:
- Manufacturing Leads 2nd Quarter GDP Growth;
- Oil Prices Accelerate July Inflation but Still Within
Targets;
- Producer Prices Also Increase More than Expectations;
- Survey Shows a Slow Improvement in Poverty; and
- Five Consortiums Chosen as Finalists to Build Power
Plants.
End Summary.

MANUFACTURING LEADS 2ND QUARTER GDP GROWTH
--------------


2. South Africa's economy grew at a faster pace in the
second quarter 2005, primarily due to manufacturing growth
of 7.3 percent. South Africa's real gross domestic
product (GDP) at market prices on a quarter-on-quarter
(q/q),seasonally annualized and adjusted (saa) increased
by 4.8 percent in the second quarter of 2005, compared to
3.5 percent growth in the first quarter. The 4.8 percent
growth rate exceeded expectations, with the consensus
forecast at 4.4 percent, and put the South African
government's 2005 GDP forecast of 4.3 percent within
target. The manufacturing sector was the main engine of
second quarter growth, expanding by 7.3 percent on a
seasonally adjusted and annualized basis compared with a
first quarter decline of 1.9 percent. Sectors
contributing to the second quarter growth include: the
manufacturing industry (accounting for 1.2 percent);
wholesale and retail trade, hotels and restaurants
industry and finance, real estate, and business services
industry (0.7 percent each); transport, storage and
communication industry (0.6 percent) and agriculture,
forestry and fishing; general government services and
personal services (0.3 percent each). The seasonally
adjusted real value added by the non-agricultural
industries increased by 4.7 percent during second quarter
following an increase of 3.5 percent in the first quarter
of 2005. Manufacturing is the second largest sector of
the economy, accounting for 16.4 percent of GDP. The
finance sector is the largest sector and is responsible
for 18.6 percent of GDP. On a saa q/q basis, real GDP
last posted negative growth in the 3rd quarter 1998 (0.9
percent decline),since then there have been 11 out of 28
quarters of growth at 4 percent or above. Source:
Reuters, I-Net Bridge, and StatsSA Release P0441, August
23; Business Day, Business Report, August 24.


3. Comment. StatsSA calculates GDP using the production
and income approach; the South African Reserve Bank (SARB)
compiles GDP using the expenditure approach. The expected
release date of the 2nd quarter 2005 SARB Quarterly
Bulletin is September 22, where expenditure (consumption,
investment and government spending) components of GDP are
released. The StatsSA GDP release focuses on industrial
production sectors explaining GDP growth. A recent
Standard Bank study describes industrial sector growth
prospects over the next five years and the structural
shifts in the South African economy. Over the past four
decades, the South African economy has shifted from growth
driven primarily by agriculture and mining to growth
driven by wholesale and retail trade, tourism, transport,
communications, and services. According to Standard Bank
forecasts, high growth in manufacturing, business
services, transport and communication, and wholesale and
retail trade will generate an average annual GDP growth of
4 percent over the next five years. End comment.

OIL PRICES ACCELERATE JULY INFLATION BUT STILL WITHIN
TARGETS
-------------- --------------


4. CPIX (consumer prices minus mortgage costs) increased
4.2 percent in July, up from June's 3.5 percent increase,
chiefly due to a 32 rand cent/liter increase in gasoline
prices. July consumer prices increased 3.4 percent (y/y)
compared to June's increase of 2.8 percent. July's
increase in targeted inflation (CPIX) was higher than the
consensus forecast of 3.9 percent and if oil prices
continue to escalate, future interest rate reductions
would become less probable. Transport costs accounted for
30 percent of July's increase, although some of the
pressure on consumer prices will not affect August
inflation. New surveys of rental, electricity and water
costs completed in July accounted for 40 percent (30
percent attributed to housing and 10 percent to fuel and
power) of the 4.2 increase in CPIX. CPIX is still well
within the 3-6 percent targeted range and oil prices
remain the main contributor to a possible increase in
August's inflation. If oil prices continue to escalate,
most forecasters expect interest rates to remain unchanged
for the rest of 2005. Prices of services increased faster
than goods (6.1 percent vs 3.4 percent) and prices for the
lower expenditure groups increased slower than the prices
faced by the higher expenditure groups. Source:
Investec, CPIX Update; Standard Bank, CPI Alert; StatsSA
Release P0141.1; August 24.

PRODUCER PRICES ALSO INCREASE MORE THAN EXPECTATIONS
-------------- --------------


5. The July Producer Price Index (PPI) rose by 3.6
percent (y/y) higher than a Reuters poll of economic
forecasts of 3.3 percent. PPI, which tends to lead
consumer inflation by a couple of months, rose by an
annual rate of 2.3 percent in June. July domestic and
imported goods prices increased 3.0 percent and 5.2
percent, respectively, compared to June's increase of 1.9
percent and 3.4 percent. The higher imported goods price
reflects the impact of higher world oil prices. The
prices of petroleum and coal products more than doubled,
while prices of agricultural, paper, basic metals and
tobacco products also showed a higher July price increase
compared to the previous month. The last month where
overall producer prices declined was April 2004; since
then, producer prices have increased an average of 1.6
percent y/y. Since May 2005, producer prices have
increased over 2.3 percent, signaling possible future
increases in consumer prices. Source: Business Day,
Reuters, StatsSA Release P0142.1, August 25.

SURVEY SHOWS A SLOW IMPROVEMENT IN POVERTY
--------------


6. A recent All Media Products Surveys (AMPS) survey
demonstrated that there has been dramatic change in the
income shares of different races since 1994. From 1993 to
2002, black Africans increased their share of the top 10
percent of household income, from under 10 percent just
before 1994 to 23 percent in the second half of 2002.
"Coloureds" (a distinct South African racial category)
also increased their share slightly, while the white share
fell sharply from nearly 80 percent to 63 percent.
However, the rate of change slowed after 2002. Coloured
people continued to advance post-2002, but the shares of
all other groups remained static, and may even have fallen
slightly among black Africans. According to the AMPS
survey, the following trends emerge: (1) a slight but
significant decline in black poverty is occurring, due
largely to the expansion of social grants; (2) there is a
modest but significant expansion of the numbers of blacks
in the "not so poor" category of R1,400 ($220 using 6.4
rands per dollar) to R4,000 ($625) per month; (3) abject
or severe poverty among coloured people is roughly half of
what it is among blacks and impacting less than 10 percent
of Indians and less than 5 percent of whites; (4) the
lower middle class among blacks (R4,000 - R12,000 per
month) has not expanded over the two years; and (5) the
expansion of the categories of relative wealth of R12,000
and more per month has been more rapid among coloureds,
Indians and whites than it has been among blacks. The
semiannual AMPS is one of the largest annual measures of
income and other socio-economic patterns provided by the
All Media Products Surveys (AMPS) of the South African
Advertising Research Foundation, using large and fully
representative samples of 25,000. The purpose of these
surveys is to estimate readership patterns and to relate
them to basic social and economic characteristics,
including household income per month. Source: Pretoria
News, August 23.


7. Comment. The AMPS survey is the only South African
expenditure survey conducted each year. The survey and
results are private. Official expenditure studies will
use the StatsSA expenditure surveys, where both results
and methodology are readily available. However, the
official surveys are only conducted every five years and
their changing methodologies make comparisons over time
difficult. End comment.

FRAZER