In Q2 2011 SA fixed investment spending rose by a welcome 4.1%q/q, annualised. This compares with growth of 3.1%q/q in Q1 2011 and a decline of 3.7% for 2010 as a whole.
The latest improvement was driven by a further pick-up in investment spending by public corporations (+4.4%q/q) but also by an encouraging jump in private sector investment activity (+4.0%q/q) as well as by general government (+3.8%q/q). Prior to Q2 2011, investment spending by general government (mainly provinces and municipalities) had declined for nine consecutive quarters, despite promises and budgets to the contrary.
Investment spending by public corporations continued to benefit from the current expansion activities undertaken by Eskom and Transnet. According to the Reserve Bank, Eskom increased its capital spending on vehicles and machinery/equipment as work on the construction of the Medupi, Kusile and Ingula power stations continues. Transnet’s ongoing capital projects, in particular the new multi-product pipeline, increased their expenditure on machinery and equipment as well as construction works.
Within the private sector, the agricultural, mining, transport, storage communication sectors all contributed to the improvement in investment activity. In particular, the Reserve bank highlighted the ongoing capital outlays on the fibre-optic and cellular networks by companies in the communication sector.
Within general government there was a very welcome improvement in investment activity, albeit off an extremely low base. This included an uplift in housing and construction works.
The rapid slowdown in the rate of growth of investment activity during 2010 (the expected post world-cup fall-off in investment activity was aggravated by the lackluster global economic and a lethargic local government sector) meant that investment spending fell to a low of only 18.7% of SA’s GDP in Q1 2011, which was the lowest level recorded since Q3 2006, and extremely low by emerging market standards. Fortunately, the latest improvement in capital formation by public corporations, general government and the private sector has meant that fixed investment spending as a percentage of GDP has risen to 18.9%. While this is still a long way from the most recent peak of 24.6% of GDP achieved in Q4 2008, it is at least a move in the right direction.
We expect this improvement to continue into 2012 (but not at the pace achieved from 2003 to 2008), helped by further infrastructural projects (eg recently announced Winelands Road project, but also further private sector initiatives, including a backlog of IT spending).
The country has an informal target of increasing investment spending to over 25% of GDP and maintaining it at that level for many years. Internationally, there is a reasonably clear relationship between increased investment spending and sustained higher GDP growth (see chart attached), with the level of investment ultimately determining the level of employment.
While reducing the level of unemployment (and hence job creation) has become the number one economic objective in South Africa (finally), the country’s employment target cannot be achieved without a commensurate and sustained increase in investment activity by the private sector.
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