Sluggish profits can hurt SA’s outlook for new jobs
THERE are three conventional ways in which GDP is measured. First, we can estimate the size and growth of the value of all goods and services produced in a country during a calendar year by summing up the net output of all sectors. This is called GDP by value added or by production.
Second, we can calculate how much was spent on GDP, the expenditure estimate.
Third, we can estimate GDP by calculating the returns to the factors of production, which are the labour and capital that produced GDP.
Data released this week showed that the South African economy avoided recession. A technical recession is defined as two quarters of negative growth. By eking out an annualised growth of 0.7% in the third quarter we narrowly avoided recession after the contraction in the second quarter. The primary sector of the economy — agriculture and mining — was particularly weak, contracting by an annualised 10.4%.
Agriculture has been buffeted by drought; mining has been held back by low commodity prices, loadshedding and labour unrest.
Also released this week was the often ignored alternative measure of GDP, which splits the economy into corporate profits and wage growth.
The trends from this perspective are concerning.
What is positive is that wage growth is proving resilient. South Africa’s overall wage bill grew by 7.9% in the third quarter compared with the same period last year. This means the overall wage bill grew by 3.2 percentage points more than inflation. Sectors that are contributing to the resilience in growth of the total wage bill are manufacturing, utilities, transport, storage and communication, financial services and the government. In general, these sectors are recording wage bill growth of more than 8%.
However, of concern is that the relatively healthy growth in wages coincides with exceptionally weak profit growth. Growth in overall profits, as measured by gross operating surplus, slowed to 0.3% in the third quarter compared to the same period last year.
This is the lowest rate of overall profit growth on record. Stats SA has been collecting this data since 1993. When adjusted for inflation, profit growth has been negative for at least a year.
The slowdown in profit growth is broad-based, but as with output growth, there is acute pain in the agricultural, mining and manufacturing sectors, where profits are contracting in nominal terms.
The significant and persistent deceleration in profit growth is attributable to ailing revenue growth and rising input costs.
Domestic revenues are probably coming under pressure because of the weak terms of trade resulting from the significant decline in the price of South Africa’s export commodities. In turn, the weak terms of trade have led to a slowdown in national income, resulting in weak economic growth even in nominal terms.
In terms of input costs, business has been buffeted by, among other things, sticky wages and accelerating administered prices, including for electricity and water. For example, while inflation averaged 4.7% during the third quarter, electricity inflation averaged 11.2% and the wage bill grew by almost 8%.
The combination of relatively low domestic demand growth, low profit growth and low core inflation suggests that the domestic private sector has been unable to pass high costs on to consumers and to reduce costs due to an inability or unwillingness to shed labour. The pain has instead been absorbed in profits.
There are several potential implications of low profits. First, it is difficult to see the private sector contributing meaningfully to job growth as long as these persist.
Second, private-sector fixed investment fell by 3.4% last year, and a noticeable improvement is unlikely when profits are thin. This is in an environment in which public-sector fixed investment is likely to begin moderating as the large projects of public corporations approach completion. Low fixed investment will threaten our longer-term growth potential.
Finally, persistently low profits could put core inflation — which has been well behaved, even with a weak rand — under upward pressure, because business could eventually be forced to raise prices even if growth is weak.
Nxedlana is FNB chief economist