Last week Rand Merchant Bank economist Ettienne le Roux spoke at the School’s seminar series. This post draws on my notes from his presentation, Global challenges meet domestic imbalances, and examines the growth prospects for the South African economy.
The first step in any such analysis is to have a look at the current state of affairs and in a week of growth scares and a fall in commodity prices, it did not look good. Since the global financial crisis, emerging market economies have topped the growth charts, but the US and EU are still deleveraging (in the EU to the point of crisis). Growth rates in real GDP per capita over the period 2008 to 2012 (total over the period, not average annual rates) shows that the US economy is today 3% bigger than in 2008. The Eurozone is 3% smaller and Spain’s economy has shrunk by 8%. In comparison, growth in China was 45%, in India it was 33% and in Brazil 7.5%. The South African economy grew by more or less 8% over the five year period.
This does not really set the scene for export-led growth for South Africa. Exports to Europe and North America still account for more than a third of our total exports and these economies are bound to grow slowly for some time.
But the South African economy has grown a bit from the 2008 peak – so where did this growth come from and can it be sustained?
A quick breakdown by sector shows the supply-side of the growth. The sectors that have grown faster than GDP were: Trade, Construction, Finance, Transport and Government Services. Mining, Manufacturing and Agriculture have not recovered to the 2008 peak levels.
The demand-side of this growth story is all about the domestic economy. Export orientated sectors have suffered and output is still 12% below the 2008 peak level (and keep in mind that exports = 24% of GDP). The growth has in fact been driven by a mini consumption boom. Household consumption spending makes up 65% of GDP and has been positive. Yes, there has been some private sector fixed investment (13% of GDP), but it has only been catching up to pre-crisis levels. There has also been some fixed investment by State-owned Enterprises and some government fixed investment, but even when growth rates of these investments are high, they make for small parts of GDP (4% and 3% respectively). Along with households, the other part of the consumption boom has come from government pursuing counter-cyclical fiscal policy. The consumption-side of this spending has been increases in the public sector wage bill and the social wage.
The end result of the growth that did occur since 2008 has shown up in three gaps:
Investment > Saving, Government spending > Tax income, Exports < Imports
To finance this, South Africa borrowed R200bn of savings from the rest of the world in 2012 (in one way or another). Looking at it in another way, 35% of fixed investment is funded by foreign savings, foreigners own 35% of government debt and 40% of equities.
So what does this mean for future growth prospects?
- Can growth in private consumption be sustained?
- What are the government’s plans for their consumption spending?
- Can public investment save growth?
- Will the private sector invest and drive growth?
- Can exports improve to lead growth?
There are a number of clear indicators that we will not be able to consumer our way to a growing economy. Most importantly because employment creation has been slow and the limited number of jobs that have been created have often been in the public sector. With employment stagnant, compensation has also been growing slower. The result is that the consumer spending that we have seen, is linked with the growth in unsecured lending. But this has everyone worried and the banks are looking to tighten credit extension. In addition, consumers are also worried about food and fuel price inflation. The end result is that consumer confidence is low.
As said above, fiscal policy has been expansionary since the financial crisis. The deficit is currently at 5.2% of GDP and the Minister of Finance has outlined the plans to reduce this to 3% of GDP. This could have far reaching consequences as fiscal policy has been supportive of consumption: The wage bill has grown by 14% per annum since 2008 and wages by 12% per annum since 2008. This makes up more than 50% of total spending and plans to reduce the deficit mean less support for growth – whether it is in the form of reduced spending by government or by households spending those salaries and grants.
A related question is about how the deficit will be reduced. Projections show that tax revenue has to grow with 11% through to 2015/16. That is faster than the nominal GDP, projected to grow at 9.5% over the same period. This means higher tax rates, new taxes, or more efficient tax collection to earn the increased tax revenues. At the same time spending must grow by only 8% over the period.
If this contraction of fiscal policy is achieved it will dampen growth. If it is not, it will leave the fiscus with the bigger budget deficit, more debt and less creditworthiness.
Between hard-pressed consumers and fiscal austerity approximately 80% of GDP looks set to lose growth momentum.
On the public side, government and the parastatals have outlined ambitious investment plans. But these make for small portions of GDP and will only succeed in driving growth to the extent that it can crowd-in private sector investment. So will the private sector come to the rescue of the economy? In fact, there has been a weak investment response to the upswing of the economy. There a number of different reasons for this and none of them bode well for future driving of growth:
- There are fewer companies around after the crisis, to do the investment.
- There was some over-investment during the boom period, which dampens investment now.
- There is a fair bit of uncertainty, about the international economy, about labour about policies in South Africa, that rewards waiting and seeing, instead of investing.
But this is not to say that there is an investment strike. There are firms investing, but what is the nature of that investment? The bulk is in machinery and equipment and there is a clear focus on efficiency. In the long-run this will be good for growth, but in the short-run, capital is replacing labour and a large part of that capital is imported. In addition, many South African firms are investing elsewhere in Africa.
Since the global financial crisis, South Africa had a dismal export performance. Exports have not recovered to the 2008 level and South African exports have been losing market share. This is due to a combination of weak growth in traditional export markets, infrastructure constraints, licensing constraints and skills shortages, all adding up to higher costs and uncompetitive exports.
All this adds up to a vulnerable macroeconomic position and limited growth prospects. South Africa is more likely to muddle through at growth rates of 2-3%, than it is to achieve the growth rates of 5-6% required to address unemployment, poverty and inequality. The possible consequences of failing to grow-for-development is a topic for another post.
* The School would like to thank Ettienne for the time and trouble to present at the seminar. His talks are always excellent and a high point of the seminar series. All errors and omissions in this post remain our own.