Hard numbers encouraging for budget
When our newly minted minister of finance, Tito Mboweni, presents his update on the state’s finances later this month, he will have little alternative but to look through the rear-view mirror.
GDP and the balance of payments — crucial information for the budget —will have been estimated only up until June 2018 and will be revised. The coinciding business cycle, which is a good proxy for GDP, calculated and published on a monthly basis by the SA Reserve Bank, is as out of date as the GDP numbers.
September’s consumer price inflation data will also be released on October 24. He must hope that the misanthropes at his old Reserve Bank do not regard possibly higher inflation, in the wake of the weaker rand and the higher petrol price — very obvious negative supply side shocks to economic growth — as reason to hike interest rates. That would further depress growth in spending, GDP and tax collections without altering the path of inflation in any predictable way.
INFLATION
Mboweni can take consolation from the market reaction to his appointment. The rand immediately strengthened on the news, not only against the US dollar but also by a percent or two against the currencies of our emerging-market peers. Alas, global economic developments a day after his appointment — pessimism about global and especially emerging-market economic prospects — weakened the rand against the US dollar and undid the good news. A stronger rand can clearly reduce inflation and, if it is sustained, reduce the compensation for inflation.
Our new finance minister will hopefully recognise that raising tax rates to close the gap between government spending and revenue is a large part of the problem of, rather than the solution to, SA’s stagnation.
Perhaps he will report progress being made in privatepublic partnerships, alias privatisation, in taking assets and liabilities (actual and contingent) and interest payments off the budget.
The latter is now running at over 11% of all government expenditure and is likely to increase further.
I can offer the minister a little consolation derived from some very up-to-date indicators of the current state of the economy. That is from new vehicle sales and the supply of cash issued by the Reserve Bank in September. These are actual hard numbers and do not depend on sample surveys that take time to collect and collate.
These two hard numbers are combined to provide a hard number indicator of the state of the economy. It does a very good job anticipating the turning points in the SA business cycle.
If current trends in new vehicle sales and the demand and supply of cash persist, the hard number indicator is pointing to positive real GDP growth of what would be a very surprising possibly 3% over the next 12 months. Current sales of new vehicles are running at an annual rate of 551,000, forecast to rise modestly to an annual equivalent of 570,000 units in 12 months.
The demand for cash suggests more impetus for growth. It is recovering quite strongly and is expected to grow 7% in 2019, and when adjusted for consumer price inflation, to rise at a near 4% real rate in 2019.
What does this growing demand for old-fashioned notes and coins say about the SA economy, given all the electronic alternatives to cash? It suggests that much economic activity is not being recorded in the GDP data.
Raising the contribution made by the unrecorded economy to GDP is long overdue. It would improve all the critical ratios by which our economy is judged.
We economy watchers and the Treasury must hope that this growth in the demand for and supply of cash — so indicative of spending growth — continues to run ahead of inflation.