Grim economic data a warning

Joint effort needed to boost SA economy

RAISING questions about the extent to which our economic woes are locally as opposed to globally driven is no mere academic exercise. Our response depends in large part on the problem we are trying to fix. The wrong policy responses could make things worse.

That makes the local and global economic data from the past couple of weeks particularly interesting. Locally, they seem to be confirming that SA is likely to have avoided a technical recession. The data, on manufacturing and mining output and on retail sales, suggest the second-quarter gross domestic product figures, due to be released next week, will show slightly positive growth, after the first quarter’s contraction.

But recession or not, the growth outcome for the full year will still be extremely weak. Economists have been revising their growth forecasts down consistently, and often sharply, since the beginning of this year and projections that once would have looked profoundly pessimistic — such as the Reserve Bank’s new forecast of 1.7% — are now fairly standard.

With growth not expected to pick up sharply over the next couple of years, the new normal for SA is looking to be more muted than before. That has implications for everything from jobs and incomes to fiscal space and government programmes, and it is not clear that policy makers have got their heads around what the next few years of low growth will mean.

The balance between local and global drivers of low growth matters, though, in shaping any policy response. Data out last week suggest parts of the global economy are in more trouble than we thought.

However, the woes of Europe and China are not the only or even the primary reason for SA’s failure to thrive. Most disappointing has been the eurozone, which seems to have ground to a halt. It reported zero growth in the second quarter, in large part because of the contraction in the German economy. France and Italy were already in trouble but when Europe’s largest and most robust economy starts shrinking, we should be worried.

Stagnation and deflation are the threatened scenarios. Many blame policy makers’ focus on fiscal consolidation, and call for more aggressive monetary stimulus by the European Central Bank (ECB) to arrest the slide. If the ECB were to implement American-style quantitative easing, that could inject liquidity, which could be good for emerging markets.

It would at least help to counter the withdrawal of monetary stimulus by the US Federal Reserve, which is expected to end its asset purchase programme by October and start raising interest rates next year.

China’s 7.5% growth target is in doubt. For SA, it is the biggest driver for resource exports while Europe remains our most significant trading partner, rivalled only by the rest of Africa. That suggests SA will not find it easy to attain exportled growth, in a global economy whose recovery is proving to be more bumpy than expected.

But we cannot blame our growth woes primarily on the global economy. Though their focus is different, other emerging markets such as India are managing to grow their exports rapidly and to cut current account deficits.

SA’s growth constraints have tended to be local rather than

Other emerging markets such as India are managing to grow their exports rapidly and to cut current account deficits

global lately, with labour disruptions, input costs, power and logistics constraints, household overindebtedness and very low business and consumer confidence. It’s no good waiting for the global economy to turn: the solutions must be found here. The latest Manufacturing Circle quarterly survey shows there is much to solve, with smaller manufacturers finding the going very tough. Export and local demand are pretty weak; labour and input costs loom large; and the industrial policy efforts of the government seem to have very little effect.

Manufacturing is less than 20% of the economy and there are other sectors — such as services and agriculture — that could do with attention too, and could contribute to exports. In services, as in manufacturing, the dearth of domestic demand is one of the factors holding back investment and growth.

Even in a halting global environment, SA could do much more to improve its export performance. But tackling the low growth outlook requires attention to the domestic economy and how to get the key players to work together to make it more robust.