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Cablegate: South Africa Economic Newsletter

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PRETORIA 001413

SIPDIS

DEPT FOR AF/S/JDIFFILY; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR OAISA/BARBER/WALKER/JEWELL
USTR FOR COLEMAN
LONDON FOR GURNEY; PARIS FOR NEARY

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
April 8 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:
- Unemployment Rates Drop;
- Increase in Jobs and Earnings;
- March Manufacturing Activity Reaches Six-month High;
- Extra Tax Revenue Reduces Budget Deficit;
- But How Should the Revenue Surplus Be Spent?;
- March Housing Prices Lower; and
- First Signs of Consumer Spending Slowdown.
End Summary.

UNEMPLOYMENT RATES DROP
-----------------------

2. The Statistics SA Labor Force Survey (LFS) showed a
gain of 251,000 jobs and a drop in the official
unemployment rate from 27.9 percent in March 2004 to 26.2
percent in September. Using the expanded definition of
unemployment, which includes discouraged workers or those
who made no effort to seek employment in the four weeks
preceding the survey, the unemployment rate changed from
41.8 percent in March to 41 percent in September. The
number of discouraged workers increased from 3.77 million
in March to 3.95 million six months later. The biggest
growth in jobs came in the construction (25 percent) and
trade (8 percent) sectors, which have benefited from low
interest rates. Impacted by the strong rand and drought,
the mining and agriculture sectors experienced employment
reductions of 27.5 percent and 15.5 percent, respectively,
in the six-month period. Excluding agriculture,
employment levels increased by 209,000 and 180,000 jobs in
the formal and informal sectors respectively, between
March and September 2004. Non-agricultural employment in
the informal sector accounted for 19 percent of total
employment; if domestic workers are included, the
percentage increases to 27 percent. The LFS shows that
youth unemployment has fallen but remains high.
Unemployment among 15- to 24-year olds, the fastest
growing segment of the population, fell from 55.6 percent
in March to 51.8 percent in September. Unemployment
remains highest among Black Africans, at 31.3 percent,
followed by "coloureds", at 21.8 percent, Indians and
other Asians at 13.4 percent and whites, at 5.4 percent.
The Western Cape Province had the lowest unemployment at
less than 20 percent, while Limpopo, North West, KwaZulu-
Natal and the Eastern Cape provinces had levels of more
than 30 percent. Gauteng provided most of the employment
opportunities, with about three million jobs, while the
Northern Cape provided about 230,000 jobs. Source:
Business Day, April 1; Mail & Guardian, April 1-7;
Statistics SA, Release P0210, March 31.

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INCREASE IN JOBS AND EARNINGS
-----------------------------

3. Statistics SA's Survey of Employment and Earnings
(SEE) showed a 4 percent y/y rise in employment while
earnings increased by 14.9 percent in the formal,
nonagricultural sector in the fourth quarter of 2004. The
SEE counted 6.685 million jobs in the formal sector as of
December 2004, an increase of 85,000 (1.3 percent
quarterly growth) over September's employment. The
highest level of job creation occurred in the wholesale
and retail trade sectors followed by the personal services
and financial sectors, explained by high growth in
domestic demand. Gross earnings increased 11 percent
(q/q) in the fourth quarter 2004, resulting in a 9.6
percent increase in the average earnings per employee.
Labor representatives noted the progress in employment but
argue that these figures are at least six months out of
date. Figures provided by trade unions show that more
than 20,000 workers across various sectors will be laid
off with most of the job cuts taking place by the end of
April. The mining industry is hardest hit, with more than
10,000 jobs removed and the clothing and textile sector,
due to cheaper imports, will lose 2,750 jobs in addition
to the 3,100 jobs already lost since January 2005.
Source: Business Day, April 1; Mail & Guardian, April 1-
7; Statistics SA, Release P0275, March 31.

4. Comment. In March, Stats SA released both the LFS and
SEE surveys simultaneously, although the coverage of
employment is quite different. LFS is a semi-annual
household survey, based on a nationwide sample of over
30,000 households. Stats SA staff interviewed more than
68,000 adults of working age face-to-face. The survey
reveals information on household employment in both the
formal and informal sectors, as well as discouraged
workers. Business included in the LFS is based on a
sample updated by Census 2001 and consists of all
businesses, whether VAT registered or not. SEE is a
quarterly survey of 10,183 VAT-registered (and VAT-
paying) private and public businesses in the non-
agricultural sector, completed by mail. Because of
changes in the survey sample, there is no official SEE
data before 2002. Stats SA uses 2000 and 2001 SEE data
only in discussion documents, since about 1.5 million more
jobs were recorded in 2002 over 2001 as a result of the
changes in survey design. End Comment.


MARCH MANUFACTURING ACTIVITY REACHES SIX-MONTH HIGH
--------------------------------------------- ------

5. The March Investec Purchasing Managers Index (PMI)
shows manufacturing activity has risen to its highest
level in six months. The PMI increased to 57.9 points in
March, from 54.2 in February and 49.3 in January. A drop
below 50 points indicates a contraction in the
manufacturing sector, while one above this level indicates
growth. The expected business conditions index, which
records purchasing managers' outlook for the next six
months, reached 71.5 compared to February's 66.3, and 8
percent of managers expect a drop in general business
conditions compared to February's 14 percent. Better than
expected business conditions and the softer exchange rate
explains improving expectations, with the rand
depreciating about 9 percent against the U.S. dollar since
the beginning of the year. The seasonally adjusted
employment index reached 57 points compared to February's
48.9; however, subsequent above-50 levels are needed for
improving manufacturing employment. New sales orders also
improved, reflecting strong consumer demand and improving
exports. Source: Reuters and Business Day, April 4.

EXTRA TAX REVENUE REDUCES BUDGET DEFICIT
----------------------------------------

6. The estimated deficit in 2005's budget has been
reduced from 2.3 percent to 1.6 percent of gross domestic
product (GDP) due to the almost R10 billion ($1.6 billion,
using 6.1 rands per dollar) in surplus revenue collected
by the South African Revenue Services (SARS) in the
2004/05 fiscal year (ending March). The revenue collected
by SARS was R9.6 billion more than the previous revenue
target of R345.3 billion announced in October 2004 and R21
billion more than the original revenue target of R333.7
billion announced in February 2004. SARS collected R110.7
billion in personal income tax compared with the R105.9
billion estimate; R70.6 billion in company taxes (R68.8
billion estimate); R97.8 billion in VAT (R89.5 billion
estimate); R18.8 billion in fuel levies (R17.4 billion
estimate); R13.1 billion in customs duties (R9.5 billion
estimate) and R7.1 billion in transfer duties (R5.2
billion estimate). A further R14 billion in excise duties
was collected, which was in line with estimates. Finance
Minister Trevor Manuel cited a buoyant economy and
significant consumer spending as key contributors to the
improved revenue collection during the past year. Source:
Business Report and Business Day, April 4.

BUT HOW SHOULD THE REVENUE SURPLUS BE SPENT?
--------------------------------------------

7. News of the government's revenue surplus has generated
disagreement over how the excess funds should be used.
Analysts suggest that the government is likely to use the
revenue surplus to reduce the amount borrowed on local
bond markets, reducing the government's local borrowing
requirement to R7 billion ($1.1 billion, using 6.1 rands
per dollar). Interest groups differ regarding their
preferred method of revenue surplus disbursement, with
suggestions ranging from increased infrastructure
investment and social development to reductions in current
tax rates. Strong consumer spending explains much of the
increased revenue yielding higher than expected VAT
revenues. VAT revenues are now 28 percent of the total
revenue collected, up from 25 percent in FY2003.
Efficient Group economist Dawie Roodt suggested that the
FY2005 budget deficit could be as low as 1.1 percent of
GDP, rather than the 1.6 percent forecasted by National
Treasury. Source: Business Day, April 6.

MARCH HOUSING PRICES LOWER
--------------------------

8. South African house prices increased by 26.8 percent
(y/y) in March 2005 compared to February's 29 percent
increase and September 2004's increase of 35.5 percent,
according to ABSA Bank's monthly House Price Index (HPI).
ABSA attributes the current declining trend in prices to
less housing affordability because of the high increase in
prices, salary and wage increases of well below 10 percent
and the relatively stable interest rates in 2004. In
addition, the difference between asking and selling prices
has increased and properties are remaining longer on the
market before being sold. ABSA expects nominal growth in
house prices of between 15 percent and 20 percent, with
real growth in housing prices between 11.7 percent and
16.5 percent in 2005. ABSA pointed out these favorable
property market developments: (1) personal tax relief;
(2) lower transfer duties on property; (3) strong growth
in the real disposable income of households; (3) a
relatively low ratio of household debt to disposable
income; (4) relatively low inflation and interest rates;
and (5) strong domestic and foreign demand. In 2004,
housing prices grew by 32.2 percent, 21.4 percent in 2003,
and 15.2 percent in 2002. Source: IOL, April 5; Business
Report, April 6.

FIRST SIGNS OF CONSUMER SPENDING SLOWDOWN
-----------------------------------------

9. The latest Bureau of Economic Research (BER) retail
survey suggests that retail, wholesale and vehicle sales
growth peaked during the 4th quarter 2004 and will start
to slow during the first quarter of 2005. The survey
showed a dip in retailers' confidence during the first
quarter from a 24-year high of 90 index points in the
final quarter 2004 to 75 points in the first quarter 2005.
Wholesaler's confidence levels also declined in the first
quarter 2005. The lower level of business confidence
during the first quarter of 2005 supported the BER's
earlier view of a slightly lower rate of increase in
consumer spending this year, after growing more than 10
percent last year. Sales growth slowed slightly in all
three retail sales categories, namely non-durable goods
(food, beverages and pharmaceuticals), semi-durables
(clothing, footwear, textiles and household requisites),
and durables (furniture, appliances and electronic
equipment), with non-durable goods showing the largest
slowdown in growth. The BER also found that expectations
of increases in selling prices did not occur, with the
majority of retailers lowering their selling prices during
the first quarter. Source: Business Report, April 6.

FRAZER

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