Politics cause of and solution to new economic meltdown

Low growth rates, budget deficits and rising unemployment are alarming prospects facing the country

Whenever someone asks Reserve Bank governor Lesetja Kganyago for his view on SA’s politics, he parries the question with his usual sharp humour, replying that while the Bank employs many economists and monetary policy experts, it does not employ political analysts.

It’s hard to imagine, though, that the Bank’s economists aren’t watching political developments closely, as are economists and financial analysts across the private and public sectors — because the outlook for SA’s economy now hinges, crucially, on its politics.

With the economy officially tipping into recession with the first quarter’s shock contraction, the question now is whether SA is on the way to a further negative quarter — or even a negative year for the first time since the 2009 global financial crisis.

The answer turns in large part on how businesses and consumers react to the series of dramatic events that have unfolded since the end of the first quarter. That was when President Jacob Zuma reshuffled the Cabinet and all three global ratings agencies downgraded SA, two of them to junk status.

It is in this second quarter that the battles in and beyond the ANC over Zuma’s presidency have heated up, the “radical economic transformation” narrative has taken centre stage and leaked Gupta e-mails have generated a stream of disclosures of state capture.

And it’s been in these final weeks of the second quarter that Mineral Resources Minister Mosebenzi Zwane has shocked the markets with his Mining Charter and Public Protector Busisiwe Mkhwebane has shocked them again with her attacks on the Bank’s mandates of price stability and financial stability.

What effect will all this have on SA’s already shattered consumer and business confidence? The GDP figures for the next couple of quarters could tell us.

As it is, some of the recent economic indicators have had eerie echoes of 2009 when SA’s economy contracted 1.5% in the wake of the global financial crisis and about a million jobs were lost. The latest RMB/BER business confidence index plummeted by 11 points to 29 in the first quarter, almost taking it back to levels last seen in 2009.

The index has proved to be a good predictor of what will happen to investment and growth. Its release last week prompted ratings agency Moody’s to issue a comment, saying the steep decline in business confidence was a setback for SA’s growth recovery and pointing out that 2017’s near 4% real decline in investment was similar to the drop recorded during the global financial crisis. Moody’s predicts that investment would stagnate, at best, in 2017.

The first-quarter GDP figures caught almost all the experts by surprise. Consensus had been that the economy that had contracted by 0.3% in the fourth quarter of 2016, would expand by about 1% in the first quarter. It contracted by a sharp 0.7%.

When the consensus turns out to be very wrong it is often a sign that big changes are going on in the economy that haven’t been evident in the indicators economists watch from month to month.

Those “high-frequency” indicators are fairly limited in their scope anyway: Statistics SA, for example, has monthly numbers on sectors such as manufacturing, mining and retail trade but very little on the services sector. What caught everyone out this time was how broad-based the rout was in the first quarter.

The only two sectors that showed growth were agriculture and mining — and that was mainly a rebound. All other sectors (see graph) were negative. Most notably, the tertiary sectors — trade and services — which make up the largest part of the economy contracted for the first time since the second quarter of 2009. That included the financial services sector, which declined for the first time in eight years.

The GDP figures also showed consumer spending contracting by 2.3% during the quarter. That reflects a household sector that is under severe strain because of high food inflation, high levels of debt, tighter credit conditions from the banks and the recent rounds of tax hikes which have hit middle-income households hard.

The latest consumer confidence index is not out yet, but confidence was already negative and could get a lot more so if the recession prompts fears of further job losses and the political drama makes people more uncertain about the future. When consumers’ incomes are being eroded and they aren’t confident about the future, they don’t spend – and since consumer spending is almost two-thirds of economic activity, that matters.

Investment spending matters even more for the long-term health of the economy because it puts in the capacity that is needed to sustain, or ideally improve, economic growth. While the GDP figures show investment spending grew in the last two quarters, after several negative quarters the picture is pretty bleak.

The Bank’s latest quarterly bulletin devotes a whole section to this, spelling out how the average annual growth rate of 9.2% in investment spending in the eight years before the financial crisis has crashed to just 0.6% annually after the crisis, mostly because private sector investment has fallen dramatically. Very low rates of investment growth mean the economy’s capacity to grow and create jobs has been reduced, with economists estimating that the “potential” or trend growth rate — the rate the economy could sustain without overheating — is little more than 1% at this stage, down from about 4% a decade ago.

Investment spending is all about confidence. Companies have to commit to large chunks of spending over long periods and if their executives don’t trust that demand will grow to justify the investment in new capacity and that the policy environment will be favourable, they are likely to wait and see. That’s why the confidence indicators matter.

However, the thing about two negative quarters is that it doesn’t take too much to make the next one a positive. The April data on sectors such as retail and manufacturing don’t look too bad and few at this stage are predicting a negative for the second quarter as a whole, or for the third. But it is surely too early to tell.

And given how bad the first-quarter numbers were, even if you plug in relatively optimistic forecasts of 1% quarter-on-quarter growth for the next three quarters, you still get growth for the full-year 2017 of only 0.4% at best, estimates Bureau for Economic Research senior economist Hugo Pienaar.

Economists are revising down their forecasts but chances are the consensus, previously about 1% for 2017, will come down closer to the pathetic 0.3% recorded for 2016 – or even less.

A negative number is by no means out of the question, depending on what happens in the next couple of quarters. Chances are that 2018 will not be much better, even though Fitch, for example, now expects the global economy to grow at its fastest since 2010. So far SA has proved unable to take full advantage of an improving global economy because of its internal dysfunctions.

Whether it’s a fractional positive or a fractional negative, it’s still a train smash for SA, which is heading for four years of negative real per capita growth. Everyone, on average, is getting poorer.

At such low growth rates, there is very little chance the economy will create enough employment to tackle an unemployment rate that has hit nearly 28%. The implications for the public purse and for the government’s ability to increase spending on social and other services are severe.

With growth expected to fall far short of the February budget estimates of 1.3% in 2017, rising to 1.6% in 2018, tax revenue collection will also fall short. This means the fiscal deficit will be higher than expected and Finance Minister Malusi Gigaba will have no option but to cut spending over the next two to three years if he wants to deliver on his promises to bring down the fiscal deficit and stabilise the public debt ratio. The trouble is that slashing government spending or raising taxes further will cut economic growth even more, risking a vicious downward spiral.

Low growth and fiscal pressures also make it more likely that the ratings agencies will downgrade again, adding to the downward confidence spiral. That could get a lot worse if the ANC’s policy conference this month yields a Zuma faction walkover with very investor-unfriendly resolutions, or if there are further fiascos such as the Mining Charter.

Gigaba and some of his colleagues are trying hard to talk up confidence. But without the material conditions that would justify businesses and consumers feeling comfortable about the future, they are unlikely to succeed. That leaves the ball in the court of SA’s political leaders if jobs and growth are to be salvaged.