Provincial Economic Review & Outlook (PER&O) Speech 2009
Leader of the Opposition
Members of the Provincial Legislature
Representatives of labour, business and civil society
Director-General and Heads of Departments
Today, we table the 2009 Provincial Economic Review and Outlook, or PER&O as it is commonly known, at a time when the South African economy is emerging from a global recession. Although it seems that recovery is on the horizon, ensuring a path that supports inclusive economic and employment growth is more critical now than ever before.
This year's PER&O underpins the policies and strategies of the new DA government of the Western Cape, which are focused on creating an open, opportunity society for all the citizens of our province. The PER&O will guide budget policy formulation by providing us with the economic and socio-economic contexts of the province.
When the PER&O was first published in 2005, the government was challenged by the lack of economic data disaggregated at a regional level. This challenge remains,particularly at the sector level. Despite this, the 2009 PER&O provides an overall picture of the Western Cape economy and locates it within the national and global context. It also highlights the high growth and performance sectors in the national and provincial economies in terms of their contribution to Gross Domestic Product (GDP) and employment.
The 2009 PER&O covers four broad areas:
- The Economic Outlook for 2009/10 - 2012/13;
- Labour Market Dynamics in the Western Cape;
- An Overview of Western Cape Economic sectors; and
- The Socio-economic Outlook.
Economic outlook for 2009/10 - 2012/13
During the last quarter of 2008, the global economy officially entered into a recession. This event was precipitated by financial turmoil that erupted in 2007. The massive bailout packages implemented by governments in most advanced economies were not effective in averting the recession, but are potentially important tools for the successful recovery of some economies.
Global economic activity is expected to contract by 1.1 per cent in 2009. There were, however, signs of recovery from the second quarter of 2009. The global economy is expected to gain ground in 2010, supported by wide-ranging public interventions and reduced uncertainty and risks in financial markets.
After showing resilience in 2008, the South African economy succumbed to external economic pressures and slipped into recession in the first quarter of 2009. We remained deep in recession in the second quarter.
According to the Bureau for Economic Research, economic growth for South Africa is projected to contract by 1.7 per cent in 2009. This figure is slightly more optimistic than National Treasury's prediction of a 1.9 per cent contraction. BER predicts that the national economy will recover to show 2.7 per cent growth in 2010. This will be supported by an escalation in infrastructure spending, an increase in real consumption expenditure as a result of lower interest rates, the 2010 FIFA World Cup and the recovery in the world economy, which is expected to aid exporting sectors.
The Headline CPI inflation is expected to average 7.1 per cent in 2009, but revert to the target band in 2010, averaging 5.7 per cent. This forecast factors in an increase in Eskom's electricity tariff rates, roughly in line with the 2009 increase. The South African Reserve Bank (SARB) has identified cost-push pressures such as electricity price increases as the rimary risk to the inflation outlook. Double-digit wage settlements and persistently increasing oil prices, however, remain the usual risk factors.
Growth trends in the Western Cape are heavily dependent on events in the global and national economy. During 2008, our province's economic growth performance remained positive, with an estimated expansion of 3.5 per cent. The key drivers of this growth were the finance, insurance and construction sectors. However, in line with the national economy, the Western Cape has also been hit by the economic crisis. The present scenario is bleak with downward revisions in growth projections for the medium term. A slow recovery is expected in 2010.
Our economy is forecast to contract by 1.0 per cent in 2009. In line with the rise in global and national economic activity, a moderate recovery of 2.6 per cent is forecast for 2010.
The sectors dominating economic activity in the Western Cape are: financial intermediation, insurance, real estate and business services, manufacturing and wholesale, retail trade, catering and accommodation. These sectors were all impacted negatively by the recession and saw declining levels of production. Our construction sector is expected to remain a key driver of growth in the province.
The performance of the Western Cape economy depends chiefly on the performance of the finance, insurance and business services sectors. These sectors dominate economic activity in the province, comprising nearly a third of our output. Their performance is likely to play a big role in how the economy fares in years to come.
Research suggests that the contribution of manufacturing to our GDPR has declined,while the contribution of the services sector to our GDPR has increased. While it is acknowledged that it is possible to have viable and sustainable growth by producing services for export to other provinces and countries, the fact remains that for most developing countries, and for regions within developing countries, it would not be wise to neglect industrialisation as a growth engine.
While growth was strong for the agricultural sector in 2008, it is expected to slow down significantly in 2009. Growth in the wholesale and retail trade, and catering and accommodation sectors is shown to have slowed notably in 2008, and fell to negative levels in 2009. This sector is expected to recover in 2010.
The Western Cape is largely an exporter of primary products. Exports from the Western Cape to the rest of the world grew by 24.7 per cent between 2007 and 2008.The major categories of exports for the province in 2008 comprised of: Vegetable products (19.4% share), mineral products (19.3%) and prepared foodstuffs:beverages, spirits & vinegar, tobacco & manufactured tobacco substitutes (17.5%).
Labour Market Dynamics in the Western Cape
South Africa, including the Western Cape, continues to face the challenge of creating sufficient employment opportunities and mitigating the rise of unemployment levels. Addressing this challenge is particularly difficult because we have a large supply of unskilled labour and high demand for skilled labour.
Between 2003 and 2008, the working age population of our province (individuals between the age of 15 to 65), grew more rapidly than the national average. However it is not the growth in the working age population that places a burden on the economy to create employment: it is rather the expansion of the labour force, i.e. people in this age group who can and are willing to work. The Western Cape experienced labour force growth of 2.5 per cent between 2003 and 2008, driven by the increased participation of working-aged Africans, females, older age segments and individuals with incomplete further education and training or higher levels of education.
Due to the above factors, employment in the Western Cape between 2003 and 2008 increased more slowly than in the country as a whole, and was not adequate to stem the rising levels of unemployment.
Narrow unemployment in the Western Cape increased by 55 000 people or 2.7 per cent over the period 2003 to 2008. Unemployment rates are highest amongst Africans followed by Coloureds and then Whites. The rate of unemployment is also higher amongst females compared to males in 2008. The youth continue to bear the burden of the highest rates of unemployment. This is a problem that we recognise, and are determined to correct.
The Coloured population group represents the majority of the Western Cape's population and the majority of employed are Coloured. However, a shift in the racial composition of employment in the province occurred between 2003 and 2008. The share percentage of employed African people has increased from 20.0 to 26.7 per cent, representing an annual average growth rate of 8.6 per cent. The share percentage of employed White people has decreased from 24.8 per cent to 17.5 per cent, indicating a negative annual growth rate of 4.4 per cent. These figures suggest that the Western Cape job market is becoming ever more accessible to the African race group.
If we look at the employment absorption rates across race groups, the White population is still highest. However, the employment absorption rate amongst Africans is increasing, indicating further progress towards equal access to employment opportunities amongst race groups. We will continue to encourage and support these positive signs of redress.
In 2008, males still dominated formal employment at 58.9 per cent. However, the share of females in formal employment has seen improvement between 2003 and 2008, with an increase of 1.4 percentage points. It is our goal to see this figure rise substantially over the coming years.
The link between education, skills and employment is inextricable. This is evident in trends observed in the Provincial labour market. The majority of our employed have either Matric, incomplete FET or complete GET. It is worth noting that the province has a relatively smaller share of people with no education (0.7 per cent) and a relatively bigger share of people with incomplete FET who are employed (27.5 per cent), than in South Africa as a whole (2.6 per cent and 23.4 per cent respectively). When taking these figures into account, it becomes evident that the primary thrust of our government must be the improvement of our education system.
The major employment sectors in the Western Cape remain wholesale and retail trade, manufacturing and community, social and personal (CSP) services. Manufacturing and construction play a more dominant role in employment in the Western Cape than in South Africa, while CSP services play a less significant role in employment in the province.
More than a quarter of the Western Cape's labour force is employed in highly-skilled occupations (managers, professionals and technicians) while the bulk of the workforce (almost 50 per cent) is engaged in skilled occupations. The majority of highly-skilled workers are located in CSP, wholesale and retail trade, and financial and business services. Medium-skilled workers are mostly located in wholesale and retail trade, manufacturing and CSP. The highest concentration of low-skilled workers are found in the agriculture, forestry and fishing sector (26.2 per cent), followed by wholesale and retail trade (19.5 per cent) and manufacturing (19.2 per cent).
Employment in the informal sector is not the first-choice of many workers as it provides less security, less stability and lower wages than the formal sector. However, it does act as a safety net in that it provides an income to those who would otherwise be unemployed. Employment within the informal sector is relatively small in the Western Cape in relation to South Africa. In 2008, the informal sector accounted for only 10.3 per cent of employment in the Western Cape compared with18.5 per cent nationally. The informal sector within the Western Cape is characterised as being more skilled when compared with the rest of South Africa, with 10.8 per cent of workers being classified as skilled versus 5.6 per cent nationally.
According to the most recent labour data, (2009 Q3), employment in the province stands at just over 1.9 million. While our national economy saw job losses and increasing unemployment figures, our province's employment figures remained stable, whilst our unemployment figures rose to 22.5 per cent. This was due to an increase in the rate of labour force participation in our province relative to South Africa, which saw a decline in the labour force participation rate. All in all, these figures demonstrate that the Western Cape is in a more favourable position than the country as a whole.
Over the short term, employment will still be under pressure for some time, with job losses occurring in sectors that are important employers in our province such as wholesale and retail trade, manufacturing and agriculture. Thankfully, finance and CSP services, which are also important employers in our province, have been least impacted by the recession.
Overview of the Western Cape Economic Sectors
The 2009 PER&O discusses critical growth sectors for our economy, such as agricultural and the Microeconomic Development Strategy (MEDS) sectors, at the micro level. Despite the adverse effects that the current recession has had on almost all the sectors of the Western Cape economy, the overall productive capacity has remained intact. For example, as a regional and highly successful Business Process Outsourcing and Off-shoring (BPO&O) sector, the Western Cape has consistently outperformed national industry trends through the provision of efficient niche- and industry-based services. While labour costs tend to be comparatively higher, the quality of service delivered to clients is ranked positively, allowing us to maintain the status quo.
The increase in number of contact centre agents demonstrates the growth in the telecoms sector (in delivering both low and high complexity services) with further growth expected in the sector over the next 12 months. In general, the Western Cape telecommunications firms and software development companies tend to receive the highest levels of foreign investment.
The export potential of the boat-building industry, coupled with the existence of various factors suitable to boat-building, enables an environment for a highly competitive industry with opportunity for improvement of revenue generation. Since the onset of the global economic downturn, the boat-building industry has seen many boat yards doing smaller repair jobs, training interventions and workshop maintenance, in an attempt to avoid retrenching staff.
A large percentage of employment in the film industry falls into the high- and medium-skilled category. Through its effect on support industries such as services and hospitality, the film industry also contributes to employment growth in lower level skill sets and related industries.
The Western Cape is South Africa's foremost tourism region and this sector in the province continues to show growth. This is reflected in the high and increasing contribution to the national aggregate of value added services, demonstrating potential for further growth in the Catering and Accommodation Sector. Tourism accounts for 10 per cent of total employment in the province. The craft sector has significant linkages with tourism and acts as an important draw-card for visitors to the province. From a national perspective, 27 per cent of all producers and 60 per cent of retailers are estimated to be located in the Western Cape. The high and increasing share of catering and accommodation can be linked to the prominence of the Western Cape as a tourist destination.
Even though it is envisaged that the economic crisis will impact negatively on the production and processing capacity of the agricultural sector, this sector is recognised for its contribution to income and employment, rural development and as an earner of foreign exchange.
PER&O 2009 highlights some of the socio-economic challenges influencing policy direction and intervention within the province. One challenge lies in the phenomena of an ageing population in the Western Cape. This highlights a potential need for social security and appropriate forms of care for older persons in future.
Education data for the province shows that learner numbers begin to decline after age 14 and get worse at ages 17 and 18. The result is that approximately 65 per cent of our youth do not complete matric. As a first and urgent step, it is critical that we develop ways to keep our youth in school for as long as possible or provide alternative training programmes to develop specialised skills. On a more positive note, the percentage of learners who achieve more than 50 per cent for literacy across the province has increased from 35 per cent in 2003 to 42.1 per cent in 2005 and 44.8 per cent in 2007. While these figures have improved, they are still poor and require our attention. Our numeracy figures remain a particular challenge.
Many of the determinants of health rest outside the direct influence of the health and social care sectors: education, employment, housing, poverty and the environment have a significant impact here. Homicide and road traffic injuries as a result of alcohol abuse have been identified as major contributors to the burden on health services in the Western Cape. The provision of health services cannot be addressed in isolation from the wide range of upstream and downstream risk factors of disease, which have already been well researched.
PER&O 2009 highlights the main challenges facing the province that hinder economic and developmental objectives. The external environment in which we locate ourselves necessitates a more focused approach in implementing policies that facilitate growth, support recovery and mitigate the impact on the poor and vulnerable in the economy.
Speaker, this year's PER&O has identified some major challenges that we need to tackle over the coming years. We need to support our export and growing industries by contributing to the removal of constraints. We need to become competitive and innovative so that we can build on the comparative advantage of our province. We need to urgently address the unemployment rate and the crisis looming in our education system, and look toward mitigating the factors that contribute to the burden of disease placed on our healthcare facilities. These interventions will assist us to create an environment conducive to economic growth and employment.
I hereby table the 2009 PER&O for deliberation by the house. Let us use this document as a tool to inform our strategies going forward.
I thank you.
MEC for Finance, Economic Development and Tourism