No quick fix getting growth back on track
The economy contracted over the past two quarters, resulting in SA’s second economic recession since 1994. There is little hope of swift recovery.
Last week Finance Minister Malusi Gigaba acknowledged this when he announced that even the Treasury’s meagre 1.3% growth forecast for 2017 is now unlikely to be realised.
For a second consecutive year, the economy will grow more slowly than our population. Slow growth, Gigaba says will “compromise our ability to rapidly reduce poverty, unemployment and inequality”.
Astonishingly, our woes are mostly self-inflicted. In a recent presentation, Stanlib economist Kevin Lings demonstrated how SA’s growth since 1994 has usually been closely tied to growth in the world economy. Sometimes we grew a bit faster than world growth, sometimes a bit slower. But the now four-year collapse of our growth has occurred while the world economy grew steadily. This divergence is unprecedented.
Lings attributes SA’s growth collapse to low levels of business and consumer confidence. This, too, contrasts with high levels of business and consumer confidence globally. Low consumer confidence in SA has resulted in a sharp contraction in retail sales. Concerned about job security, South Africans are trying to reduce debt and limit spending. Their concern appears to be worsened by political instability. The downgrading of SA’s credit rating to junk shocked many.
Similar concerns are affecting business confidence. The RMB-Bureau of Economic Research business confidence plunged in the second quarter. All five economic sectors surveyed showed weakening confidence. RMB notes that such broad-based falls in confidence are unusual and may signal an acceleration in the current downswing.
Low levels of business confidence mean business investment is weak and job creation in the private sector has slowed. Businesses wanting to expand are increasingly looking for opportunities outside SA.
Economic weakness means slow growth in tax revenue, reducing the government’s spending ability.
While the government talks about the need to work with business, its actions suggest otherwise. The firing of Pravin Gordhan and Mcebisi Jonas, and the recent release of a new mining charter without consulting producers, suggest that the government prefers to advance its political agendas ahead of securing growth.
We now face the opposite of what the 2008 Growth Report of the World Bank recommended for countries to achieve sustainable long-term growth. It notes that policy makers in successful countries understand that growth does not just happen, but “must be consciously chosen as an overarching goal by a country’s leadership”.
The report describes economic growth as a “bargain between the present and the future” in which “citizens must forego consumption today in return for higher standards of living tomorrow.” It concludes that few politicians and countries have been willing to pay this price, with the result that many fail to achieve the growth they need to escape poverty.
SA’s current political leadership is unwilling to make the hard choices required to grow the economy. Instead they have shifted their focus to redistributing the existing economic pie. This is much harder than they think.
Global experience shows it is difficult to redistribute successfully without the enabling economic growth. The result is invariably a shrinking pie. Our lapse into recession confirms this.
While such policies may benefit a small political elite, they offer little hope for the millions of unemployed and poor. SA’s shrinking economy means less funding for social grants, pensions and services. It also means rapidly growing unemployment that will leave millions more trapped in poverty for decades.