The first quarter GDP release for the South African economy showed growth had exceeded consensus expectations. The market was expecting quarter-on-quarter growth of 2.3% while actual growth was 2.7%.

At first blush this appears promising, particularly because it is led by the manufacturing sector. Scratch around a bit, however, and the optimism is tempered.

Firstly, even though the quarterly growth figures are seasonally adjusted and annualised they’re still more volatile than the year-on-year growth numbers. Growth in the South African economy year-on-year was only 2.1% – a two-year low and the fourth consecutive quarter of declining growth figures. Yearly growth figures haven’t topped 3.5% since the third quarter of 2008. The global recession is still exerting a strong pull on growth in most economies, and the Mbeki-era goal of 6% annual growth by 2014 seems like a plan for an economy far, far away.

Secondly, the manufacturing-led growth may not be heralding a sustainable recovery in the sector at all. Manufacturing grew 7.7% quarter-on-quarter, providing almost half of the overall growth in the economy. When the value-add in the sector is decomposed into output and price growth it becomes clear that it’s price rises, rather than an increase in output, that’s responsible for most of the growth.

According to the official manufacturing statistics year-on-year growth in manufacturing output was 2.3%, 4.0% and -2.7% for the first three months of 2012. Growth in the value of sales over the same three months was 11.5%, 13.0% and 6.1%. It’s clear that price rises in manufactured goods have led growth in the sector.

A closer look at the manufacturing subsectors that drove growth in the first quarter underscores this point. The petroleum, chemicals, rubber and plastic subsector showed some of the strongest growth in the quarter. Output growth for the first three months of 2012 was 1.5%, 2.4% and -1.8% while growth in sales was 30.7%, 24.0% and 13.9%.

Clearly the higher global oil price is driving price increases in the sector which in turn is underpinning growth in manufacturing to a large degree. This growth is unsustainable. In addition, corroborating evidence (from the Kagiso PMI and the Labour Force Survey releases) shows that employment and output growth in manufacturing remain weak and fragile.

The tertiary economy grew steadily, supported by a healthier financial sector with lower levels of bad debt and signs of a recovery in the motor vehicle market, but once again growth in these sectors remains one or two percentage points below the pre-2008 growth.

The outlook for the global economy remains dubious. The European Union is stuck in perpetual crisis mode, caught between bail-outs and debt default threats. Chinese growth, by its own high standards, is a tad muted. 

These first-quarter results put the South African economy on track to reach treasury’s forecast growth of 2.7% for 2012, but it will be a full nine-round fight to achieve this. South Africa’s main trading partners are on the back foot and it’s unlikely that domestic consumption will recover strongly enough to boost output. Since it’s an election year anyway we might as well watch the political spectacle unfold and put off fixing any structural problems until next year. DM

Photo: A worker checks the production flow of rand coins at the South African mint near Johannesburg July 7, 1998. REUTERS.