The South African economy is set to drift back to around a three percent anchor from the five percent mark, but there is not likely to be the situation where the foot will be lifted totally from the accelerator.

This is the view of chief economist of Standard Bank, Goolam Ballim, who told I-Net Bridge in an interview that SA's economy is due to operate at two speeds as households under-perform, but fixed investment remains strong due public sector spending.

"But this does not take away the fact that some sectors are in dire recession; but others are probably having the time of their lives," he points out.

Ballim notes that household spending is moderating sharply from between seven and eight percent real growth in 2006 and 2007 to lean to about three percent this year and next year. "So clearly there is a more than halving in the rate of growth of household spending."

Will fixed investment remain as stellar as it has been and compensate — if not perfectly — at least significantly to maintain a lofty level of GDP or mild deceleration?

Investment will remain firm

"I would say that the answer is on balance investment will remain firm," said Ballim.

Fixed investment makes up about 22 percent of the overall economy whereas household spending is about 62 percent.

"So clearly fixed investment has to grow three times the pace of household spending to make the same contribution according to the scale of the weight," he notes.

"If you have a four percent plunge, for example, in the rate of growth in household spending, you need a 12 percent rise in fixed investment just to keep the overall growth rate the same — level and at the same pace," he adds.

Ballim says that historically fixed investment in SA has been provoked and responded to the household spending cycle.

"So there is clear evidence if households retrench then fixed investment tends to lose some of its life."

What is risk of that happening right now?

"In the current cycle the positive is the public sector — it makes up roughly one third of all investment in the economy — it is an unambiguous and unprecedented programme," he says.

Ballim says it could be argued that the public sector is immune to the business cycle to a significant degree.

"You have got a state that is cash flush, the funds are there and there is less of a financial constraint to these programmes and a lot of them have got hard deadlines — the commercial and compelling nature of it is unambiguous. Eskom simply has to get its projects done, the stadia have to be built and Gautrain has to be built," he says.

Ballim says this type of investment is therefore immune to what is happening in the consumer cycle and to a large extent to what is happening in the global economic cycle.

"One third of your fixed investment mosaic is the state and that is going to remain fairly lively in my point of view," he explains.

What about the private sector?

There the answer is mixed, according to Ballim, as there are certainly some firm particularly sensitive to internal dynamics and to the interest rate cycle.

But he also feels a lot of companies will "see through the cycle" and look to a year from today where they could be in an upward phase of the business cycle and though the mid-cycle downturn and sentiment will be rising.

"Decisions have to be made today for projects over the next few years," he explains.

No brakes on investment

Ballim therefore does not believe there will be mass private sector stepping on the investment brake and slowing it down.

"Firms have had nine years of uninterrupted business economic expansion — of an upward phase in the business cycle. The clever folks are saying this is two years of that downward phase before we re-establish the upward phase. But if there is a precipitous five years then I can see hesitation."

He points out, for example, that mining firms are showing positive growth as a lot of the policy concerns are behind them.

He concludes that finance minister Trevor Manuel may need to adjust his four percent GDP growth forecast a little, but the economy could grow at around three percent because investment will remain more or less resilient.

I-Net Bridge