The Outlook for the South African Economy: Address by Gill Marcus, Governor of the South African Reserve Bank, at a dinner hosted by BMW South Africa for German Business and Financial Media, Pretoria, 4 February 2011 Thank you for the invitation to address you this evening on the prospects for the South African economy. My remarks will focus mainly on the manufacturing sector, and given that this function in being hosted by BMW, it is particularly appropriate that the motor vehicle sub-sector is currently providing much-needed impetus to the manufacturing sector. We live in uncertain and rapidly changing times, as evidenced by recent developments in North Africa and the Middle East. The prevailing political uncertainty will no doubt impact on the global economic outlook, as can be seen by the oil price breaching the $100p/b level.  The past two years have been a difficult time for the global economy, but there are signs of a recovery, despite a number of significant risks that still prevail. The recovery has been characterised as being multispeed in nature, with emerging markets outperforming the developed economies, a number of which are still dependent on policy stimuli to sustain their growth. The South African recovery has been relatively hesitant, and while we are an emerging market economy, some of the characteristics of our recovery have been more in line with those of the advanced economies. However recent indicators are more positive and suggest that the recovery will be sustained, and we can look forward to more vibrant growth in the coming years. But significant challenges remain.  The South African economy began to recover from the crisis in the second half of 2009, after three consecutive quarters of contraction. Growth in 2010 is estimated to have been in the order of 2,7 per cent, but more favourable outcomes are expected in 2011 and 2012. The current Reserve Bank forecasts, which are somewhat below the market consensus, are for growth to average 3,4 per cent in 2011 and 3,6 per cent the following year, suggesting the persistence of the negative output gap. While these levels of growth are an improvement on the recent past, they are significantly below the levels achieved in the period before the global crisis, when growth averaged in excess of 5 per cent from 2004.  The current growth rates are also insufficient to make significant inroads into the unemployment rate which increased from 21,9 per cent in the fourth quarter of 2008 to 25,3 per cent by the third quarter of 2010. This underlines the need to generate higher levels of growth. However, as much of South Africa’s unemployment problem is structural in nature, it needs to be addressed through structural microeconomic interventions, and the new growth path, as outlined by government, goes some way in this direction. A constraining factor in the performance of the economy has been the relatively slow growth in the manufacturing sector.  This sector accounts for 16,4 per cent of real value added in the economy, second only to the finance, real estate and business services sector, and is a major employer in the economy. In 2009 the manufacturing sector contracted by 10,4 per cent, despite positive quarter-on-quarter growth in the final two quarters of that year. After making a moderately positive contribution to GDP growth in the first two quarters of 2010, the sector contracted at an annualised rate of 5 per cent in the third quarter, mainly due to widespread industrial action.  Since then, the high frequency data indicate a more positive performance and outlook. Manufacturing grew at a year-on-year rate of 4,6 per cent in November and the forward looking indicators are also positive: the Kagiso Purchasing Managers Index (PMI) has been above the neutral 50 level since November, and improved strongly in January to 54,6. Similarly the FNB/BER Business Confidence Indicator showed a very strong recovery in confidence in the sector during final quarter of 2010.  Nevertheless the sector still remains under pressure, and there is evidence of significant exce