Economic woes set to continue
Coming after a bleak round of ratings downgrades, the latest economic data are likely to do little to make anyone feel better — and some economists are already muttering about the possibility of a technical recession.
Worst are the latest manufacturing monthly figures, which show the sector declined by a sharp 3.6% in February compared to February 2016. This was well below what the market had expected and came despite the positive signals emanating from the Purchasing Managers’ index in the previous couple of months.
With agriculture supposedly on the mend and global commodity prices rising, there had been hopes of a mild recovery in manufacturing, which grew by less than 1% in 2016 and, as Stanlib economist Kevin Lings notes, had its worst year since the financial crisis in 2015. Lings warns too that for the three months to end-February, manufacturing was down 0.8% on a quarter-on-quarter basis.
As it is, the sector’s contribution to SA’s GDP has already plummeted to under 12%, half of what it was in 1994. And the erosion of our manufacturing base is clearly continuing at a disturbing rate, in part because it tends to become a vicious spiral: as toothpaste producers cut output or move their facilities elsewhere, that means less demand for local tubes, cartons and pallets, so the packaging industry gets hit too.
We know that consumer demand has held up much better than the domestic manufacturing sector, so imports have been meeting an ever-growing proportion of local needs, which is not good for domestic output or jobs.
The slide in the capacity and competitiveness of SA’s manufacturing sector is, in part, because global trends are changing industrial dynamics in many other countries too. But SA’s own policy, regulatory and labour environment has to take a good part of the blame for the fact that the country is not a conducive place for investment in manufacturing.
The burden of having to comply with everything from environmental and empowerment rules to skills levies and a range of taxes, combined with often unstable labour relations, takes its toll. Industrial incentives are not nearly enough: policy makers need to take a much more fundamental look at the sector if they want to avoid further erosion.
Then there’s the retail sector, which delivered a monthly increase for February of 0.8%, which was in line with expectations. But that doesn’t make it especially good. Lings notes that the three months from December to February saw a 1.3% decline compared to the previous quarter, while on an annual basis in real terms February’s number was down 1.7%.
Nor is there much optimism about the rest of the year. Inflation and unemployment remain high and the tax burden has gone up. Consumer confidence is low and has no doubt gone lower after the political and ratings events of recent weeks. A recent Credit Suisse survey of SA and seven other emerging markets found that SA had one of the lowest percentages of consumers who expect improvement in their personal finances over the next six months.
Retail has been a mainstay of the South African economy but February’s numbers, out on Wednesday, showed another year-on-year contraction of 1.7% after January’s 1.8% decline.
That means that two of the major potential drivers of higher economic growth rate are languishing, which is why some are starting to mention the “R” word. The economy contracted in the fourth quarter of 2016 and if it contracts again in the first quarter of 2017, that would constitute a technical recession. What could save us is a nice bounce in agriculture, as the drought ends and record crops are in sight, as well as an increase in mining output and exports, thanks to higher commodity prices. We will just have to hope.
SA’S POLICY … AND LABOUR ENVIRONMENT HAS TO TAKE … PART OF THE BLAME