South Africa's 4.7% 3Q Economic Growth Raises Questions About the Country's Prospects

By Mike Caggeso
Associate Editor

South Africa's economy grew at an unexpectedly brisk 4.7% clip in the third quarter, driven by a 12.5% growth in the finance, real estate and business service industries from last year, a detailed report from Statistics South Africa said yesterday (Tuesday).

The economy's third quarter performance was a marked improvement over the revised 4.4% advance in the second quarter, and was well ahead of the consensus prediction for 4.1% growth, according to a survey of 19 economists polled by Bloomberg News.

Even so, the results seemed to prompt more questions than answers, some observers say.

"It's very positive to see growth remaining so robust," Russel Lamberti, an economist at Econometrix Treasury Management in Johannesburg, told Bloomberg. "But I'm not happy with the manufacturing sector. We are not creating the kind of growth we want to see in this economy."

Lamberti isn't the only one upset by the statistics. On the surface, an advance of 4.7% in gross domestic product (GDP) is pretty good for small economy that's struggling to assert itself. But, in addition to manufacturing, other industries - agriculture, retail, hotel and restaurants, and transportation and communication - saw their third-quarter growth rates slow.

According to, South African Reserve Bank figures show that the country's 10.5% interest rate [raised six times in the past 14 months] is starting to weaken economic growth, citing declining vehicle sales, fewer residential building plans and the narrow measure of money supply in September. Meanwhile, the South African rand has appreciated almost 12% on the dollar, weakening its revenues from exports.

"There is accumulating evidence of things looking weaker in the economy," Dennis Dykes, chief economist at South Africa's Nedbank Group Ltd. (NDBKY), told "The signal has filtered through to the consumer."

South Africa is the host of the 2010 FIFA World Cup, and the government has increased spending on railways, power production and distribution, and stadium venues to prepare for the competitive event. All totaled, the government is spending $68.8 billion on infrastructure over the next three years, which it hopes to will make up for the slowdowns in other areas of the economy.

However, if growth continues to wane, South Africa will be left with underutilized stadiums, railways and hotels built specifically for the World Cup.

Should that happen, it would end up as the ultimate economic irony: A long-term investment solves short-term woes, but end up as white elephants that weigh the economy down in the long run.

However, if you like the long-term prospects for South Africa, the iShares MSCI South Africa Index Fund (EZA) has been a solid performer.

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