The South African economy disappoints, going by fiscal vibes seeping into the ether. Growth, and therefore tax revenue, has not been as hot as hoped for earlier this year, while spending ministers seem to be firmly doing what comes naturally.

With the global mood sombre and fearing further growth slowing, South Africa is not escaping these strains. This is apparently inducing an inclination to take things easy with right-sizing our state finances after the Great Recession hit.

With government debt aiming for 45% of gross domestic product (double its 2008 low) and overall public sector debt aiming for 60% (after including parastatal debt), there remains a sense of comfort about our state finances.

Public debt is well below that of other countries; the budget deficit has shrunk from its 7% of GDP recession peak; there is time to rectify things; the economy can do with a little tonic; tax collections are disappointing while spending ambitions never tire.

Not a situation in which one wishes to be too starkly austere and press down on a modestly performing economy.

And yet, overseas there are numerous instances of countries doing just that, with a severity that should give our easy-going ways some pause.

Are things so dire?

It could well be that our growth may struggle for longer than expected; tax shortfalls may rise even as spending pressure continues rising.

With no clear national emergency hitting the panic button, and the political clamour for greater budget allocations intensifying – putting upward pressure on the budget deficit above 5% of GDP – Minister of Finance Pravin Gordhan may find it difficult to resist all such stresses.

Our fiscal policy appears to be more accommodative than perhaps intended, postponing planned budget deficit correction, and accepting some budget and debt slippage.

Does it matter?

It will if there is no change in the script soon, and the finance slippage becomes more pronounced – attracting the unfavourable attention from credit providers.

Furthermore, fiscal slippage is starting to impinge on monetary policy freedom to act to support a weak economy. It is not only the inflation prospect, the insufficient demand hobbling output growth, and the European Union crisis risks that are shaping our monetary response. A deteriorating fiscal overlay is coming into focus as well.

If the budget deficit remains too high for too long, it would start precluding rate cuts. That would be inconvenient, given the economy’s mixed messages of recent months.

Some things seem still to be performing reasonably strongly. Passenger car sales during the year to date are +16%, retail sales +5%, wholesale trade +5.4%, unsecured debt growth aggressively high. Latest monthly cement sales were +8% per trading day, real residential buildings plans were +4%, and non-residential +3% y/y.

But mining output is up only 2.2% year-to-date; steel output declined by 5.5% in August and 10% in September; oil refining output remained under pressure; buildings completed continued declining steeply; business and consumer confidence has eased.

Though manufacturing output bounced back by 5% in August, but year-to-date has done only a poorly 2%; while credit growth of 5% is only half what it should be (reflecting ongoing delivering).

Property remains a depressed area in general.

Following the disappointing 2Q2011 growth data spilling over into 3Q2011, private sector growth forecasts generally have been pulled back from nearly 4% to below 3%.

Public sector GDP forecasts have been moderated nearer 3% for this year, with a slightly higher bias for 2012. This is in an economy not noticeably succeeding in closing its sizeable output gap of 2% to 3% of GDP.

Much underutilised capacity, employable labour and buildings remain. What are we doing about it?

Some of the growth restraint is due to supply-side shortcomings that either are being addressed only in the medium term (electricity shortage, credit restraint, public sector technical manpower shortages, material shortages such as steel and bitumen), but which are long-term propositions (public transport); or do not seem to be noticeably changed at all (education and labour markets).

But even with such glaring supply restraints keeping growth back, it does not seem to be only a supply issue. Demand, too, is insufficient – as shown up in the Bureau for Economic Research business opinion surveys and recently highlighted by the South African Reserve Bank (SARB) Governor Gill Marcus to Parliament.

There appears to be a prima facie case for doing more to encourage faster growth. We are not trying hard enough to prevent fiscal slippage and relieve supply caps.

This leaves the SARB. It already has substantially lowered real interest rates (to zero), and remains deeply cautious about what soon could still play out in overseas economies and markets.

The rand remains shock-absorber-of-last-resort in times of crisis to protect domestic incomes and output. But if we were to be hit by another shock, the SARB could cut interest rates, even aggressively. Markets, in any case, expect more rate easing during the next six months, given that insufficient demand appears to be a concern.

Ideally, we should succeed in lifting the growth rate and get those many idled resources eventually back on stream.

Cees Bruggemans

Chief Economist: First National Bank