Now we have a clue why SA gets growth projections wrong

Previously in this column I have noted how often SA’s economists both inside and outside the government have been so wrong about projecting SA’s growth.

I make the point without necessarily disparaging the job they are doing; as they say, making predictions is tough, especially when you are talking about the future.

But still, you have to ask: what are they all missing? First, how bad is the problem? It’s worth asking because some argue there is a kind of necessary optimism perhaps you can call it structural optimism involved in forecasting GDP growth. All organisations, including the IMF, tend to overestimate rather than underestimate growth because the incentives to do so are enormous. We all hope for the best in the future, so predicting declines is unpopular. Being overly pessimistic is castigated while being overly optimistic is forgiven with slight sanction.

But even if you take that into account, SA’s numbers look particularly bad. The medium-term budget policy statement acknowledges the problem, and for the first time I am aware of, there is some speculation about the reasons.

What it notes is that over the past six budget cycles the government has overestimated GDP growth in its forecast. Actually, this slightly understates the problem. The most obvious example is the current year. At budget time growth for 2018/2019 was estimated at 1.3%, a pretty modest forecast. Yet with two-quarters of growth numbers in, those estimates have been revised downwards by almost half.

And it’s not just the past six budget cycles, because three before those were wrong too. Some of the misses have been small, but if you add them up, the state has been almost 90% wrong cumulatively over the past decade. That is a big miss.

At the start of 2018 most economists were estimating about 2% growth. The government’s estimates were on the conservative side by comparison. Goldman Sachs was predicting growth of 2.4% in what has turned out to be a huge rush of Ramaphoria to the head.

But the important question is why this is happening. Who leads these predictions and who follows? Turns out that in practice the IMF is the key and economists tend to check their numbers against its forecasts. The reason they do so is because an important part of national growth is global growth, and the IMF is in the best position to crunch global numbers.

So this is part of the problem; because the IMF was predicting a rise in global GDP growth early in 2018, which turned out to be correct, it seemed logical that SA would take part in the rise. In fact, SA went the opposite direction.

The disjuncture between the global trajectory and SA’s trajectory is one of the curiosities of the past few years. If you look at the IMF’s October revision of GDP rates in its world economic update, no country is adjusted as dramatically as SA. For an open economy like SA, that’ sa confounding error.

The big problems for SA’s growth in 2018, the budget documents record, were mining and agriculture. SA’s mining problems are now compounded by the decline of the gold-mining industry, and agriculture has been hit by the vagaries of the weather and the threat of farm-grabbing.

ALL ORGANISATIONS, INCLUDING THE IMF, TEND TO OVERESTIMATE RATHER THAN UNDERESTIMATE GROWTH

The realisation of the consequences of SA’s disastrous mining dispensation is gradually sinking in, which is why finance minister Tito Mboweni made great play of the fact that the amendments to mining legislation have been withdrawn. It’s also the reason the investment conference is so important, because this decline will continue until SA can reenergise its mining industry.

That’s all positive, but I have my own theory why this change of heart is necessary but insufficient. The state is determined to negotiate an agreement with the existing mining industry, because SA can’t do anything without discussing it endlessly first. But with great respect to the industry, they are exactly the wrong people to discuss the issue with. The problem is with SA’s “negotiated solution” model.

Sometimes, or often, in fact, the key to the solution is not the people who are in the industry, but the people who could conceivably be there in the future. Since they don’t exist, taking into account their needs cannot be part of a negotiated solution.

This is why, in some cases, the government is better off making its own decisions, because as the medium-term budget policy statement shows, they are the ones who ultimately have to deal with the consequences.