SA’s growth prospects take a dive
From boardrooms to barracks, we have to fix this together
A SHARP slowdown in economic growth, coupled with an unexpected surge in unemployment during the first quarter of this year, paint a bleak picture of South Africa’s economic outlook. To make the picture more gloomy, power cuts continue to wreak havoc with businesses’ output and investment.
This week, it emerged that the jobless rate has surged to 26.4% — its highest level since 2003 — while growth stuttered to a paltry 1.3% from 4.1% in the fourth quarter of last year, showing that the government services sector has contracted for the first time in 11 years.
However, Stats SA officials warned that its latest job numbers, released in its Labour Force Survey on Tuesday, should be treated with caution as they were drawn from a new sample based on the 2011 census — a decade after the previous one.
They also said seasonal factors might be to blame for the 2.1% spike in the unemployment rate, as seasonal jobs are normally shed at the start of the year and more people start actively looking for work.
Nonetheless, Kefiloe Masi- teng, deputy director-general for population and social statistics at Stats SA, said that even if the new data was not strictly comparable with the old, it presented a more accurate picture of unemployment, the economy’s biggest challenge.
The expanded unemployment rate jumped to 36.1% from 34.6% in the fourth quarter of last year. The figures showed the number of officially unemployed people rose by 626 000 to 5.535 million.
“The overall picture remains bleak and shows that government labour initiatives like the youth wage subsidy can still be drowned out by low growth, low business sentiment and a lack of economic dynamism,” said Nomura economist Peter Attard Montalto. “Our long-run view remains that the economy will not turn around to create more jobs at a meaningfully higher pace.”
This meant the main jobless rate was likely to stick at 26% in the next few years, and the expanded, more “true” measure would hover at 35-36%, he added.
Economic growth took strain in the first quarter as the agricultural, manufacturing and government services sectors shrank during the period.
There were reasons for each of these falls: for example, the sharp 16.6% fall in agriculture, forestry and fishing could be blamed on the effects of drought on South Africa’s staple maize crop, while the 2.4% decline in manufacturing was attributed mainly to load-shedding — which President Jacob Zuma said may carry on for three more years.
The 0.8% contraction in the second-biggest sector, government services, stemmed from a wave of resignations in the public sector sparked by rumours that pension reform would reduce the benefits to employees on retirement, according to Stats SA.
The mining sector also took a knock, with its sharp 10.2% decline largely due to its slow recovery from a five-month platinum strike last year, while retail trade posted a marginal, if sluggish, increase of 1.2%. Economists said this was worrying as consumers would curb spending further this year in the face of tax increases and rising inflation.
The forecast was that economic growth would end up at 2% this year — up from 1.5% last year — but this now seems in jeopardy. And economists re- main worried that growth will not gather any real momentum next year either.
“The very poor growth figure for the first quarter highlights the scale of the economic challenge facing South Africa,” said John Ashbourne, Africa economist at Capital Economics.
“Growth of less than 2% . . . is becoming entrenched and the inability of the economy to maintain modestly strong growth is a very worrying development.”
Stanlib chief economist Kevin Lings said he had revised his growth estimate for South Africa this year from 2.2% to 1.9%.
It was clear that the economy had lost momentum in the past two years after protracted strikes, regular electricity shortages with the threat of further blackouts, a lack of industrial policy clarity, and a drop in consumer and business confidence, he said.
“The rate of economic growth in South Africa has not been robust enough to lead to widespread job creation in the formal private sector,” he added.
The formal sector of the economy shed 115 000 jobs in the first quarter of this year.
THE 8.7 million jobless South Africans, confirmed this week by Stats SA data that showed the expanded unemployment rate had ratcheted up to 36.1%, should be a wake-up call to all citizens. We all need to join in a single-minded campaign, a “grand bargain” for more growth and jobs.
The facts are that in the first quarter of the year the economy grew at a quarterly rate of 1.3% (2.1% annualised) and a total of 626 000 people joined the ranks of the unemployed.
We are, some think, at a critical crossroads for investor confidence. We have to put our heads together to break the vicious cycle of low growth, high inflation and high unemployment.
No one can do that alone. It needs the government, stateowned enterprises, labour, business, educational and research institutions and individuals to play their part in a national effort.
The objective is to arrest the growth of an increasingly divided “two-speed society”: one urbane, prosperous, dynamic and nonracial, the other impoverished and overwhelmingly black, peri-urban or rural, young and unskilled, who will increasingly face off as the “haves” and “have-nots” unless we close this divide.
Nothing more starkly illustrates this fissure than the 15.5 million South Africans who are working, offset against the 3.2 million South Africans who have given up looking for work plus the 5.5 million who are not able to find employment.
To be clear, South Africa has done very well in the past 20 years in supporting the poor and creating a black middle class. This is well documented in the Goldman Sachs report “Two Decades of Freedom”.
But the newly wealthy cannot sustainably prosper while the jobless suffer.
This week, President Jacob Zuma reminded the nation in parliament that he remained committed to achieving a 5% growth rate (by 2019), and how in the short term his focus is on achieving the nine-point plan he outlined in his February state of the nation speech, centred on four pillars: “These include the current electricity shortage, the availability and cost of broadband, a regulatory environment that is cumbersome, and labour market stability.”
Indeed, despite sometimes seemingly overwhelmingly negative headlines, quiet but firm progress is being recorded by the ANC government:
The public sector wage negotiations were well managed with a generous but still constrained 7% (2% above inflation) wage increase (plus benefits) for 1.3 million workers, setting a somewhat balanced tone for the current mining wage talks;
Despite pressure on the fiscus, rising contingent liabilities and public debt from stateowned enterprises, fiscal con- trols are being firmly maintained by the National Treasury (likely at the expense of investment), creating the required stability for rating agencies to maintain South Africa’s investment-grade credit rating;
The appointment of Brian Molefe to lead Eskom’s recovery; and
A new business model for the modernisation of state-owned entities is being debated.
Usually, emerging market crises are accompanied by an extreme currency shock, fiscal blow-up, or a balance of payment or banking crisis. In the lead-up to the expected increase in US Fed fund rates, none of this is evident in South Africa. The banking sector is well capitalised, the currency is liquid, our fiscal ratios are solid and our foreign reserves reasonable. This doesn’t mean our currency cannot sharply depreciate, or our equity markets get sharply buffeted by global headwinds.
But our “self-inflicted wounds” — the underperformance of our state-owned enterprises, labour market instability, lack of overall productivity and our energy supply challenges — are hindering investment, growth and, in turn, job creation. And governance issues, corruption and lack of accountability risk endangering the credibility and hope for a turnaround in the eyes of the investors who are critical for fuelling growth and jobs.
Three structural issues are thus paramount:
First, fixing state-owned enterprises, particularly the eco- nomically systemically important institutions such as Eskom. The Chinese model of modernising state-owned entities by listing minority stakes and thereby providing the market disciplines of reporting efficiency and proper governance is being debated.
ANC secretary-general Gwede Mantashe has been quoted recently as saying: “The Chinese option is where they take a portion of a state-owned enterprise and list it, but still keep the controlling stake of that institution . . . If you call it privatisation, you are choosing an ideological path that is not in the discussions. You retain it and capitalise the entity.”
And Treasury Director-General Lungisa Fuzile commented: “The question as to whether portions of state-owned enterprises can be spun off to raise money is on the table. It is decidedly on the table. The Treasury has been asked by cabinet to look into how this could be done and whether, in the case of Eskom, it would be more feasible to do it in relation to power stations or the entirety of the balance sheet of the entity.”;
Labour market reforms need to link wage inflation and productivity, and bring stability and predictability to the workplace. Secret strike balloting is seen by many industrialists as key to labour peace. The minimum wage can also be a useful part of such a reform package. Much effort is being put into this by the government, labour and business, but more must be done; and
Regulation should be smarter and predictable, not, as it is now, well-intentioned but in practice an investment and employment killer. Land reform, mining licensing, small business regulation and manufacturing incentives should be reviewed against a single-minded objective: to facilitate investment and jobs.
We shouldn’t stop there. We need big, bold ideas. A national effort is required to work our institutions harder for the benefit of the jobless. The defence force, for instance, should actively recruit hundreds of thousands of young people to receive artisanal training, and, in uniform, these youngsters can earn a stipend by fixing community infrastructure.
We should have a national effort to support and fund small businesses to drive new employment for millions.
By just getting the basics right we can achieve 3% growth. We can reach 5% when we combine all our efforts, and with excellence of execution we can aim even higher.
Come on, South Africa. We can do it!
Coleman is a partner and MD at Goldman Sachs
Quiet but firm progress is being recorded by the ANC government