Economic Watch

SA economy hit by avalanche of bad news

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In recent weeks South Africa has been hit by a slew of survey-based ‘indexes’ and statistical reports on the economic front amounting to an avalanche of bad news.

To this dismal picture can be added that it is nigh impossible to find a single commentator or reputable economist outside of the political sphere, especially of the government variety, who sees a ray of light. 

No South African, looking at the economic news headlines, can be blamed if it takes a heck of an effort to get out of bed in the morning to put in a day’s enthusiastic effort.

Just have a look at the following list:

  • Merchantec Capital’s CEO Confidence Index showed a significant decrease from a positive score of 51.4 points in the first quarter to 45.4 points, below the neutral 50-point level, in the second quarter of the year;
  • Rand Merchant Bank Band and the Bureau for Economic Research’s Business Confidence Index (BCI) has continued to decline, falling by a further six index points in the second quarter of the year to 43;
  • BankservAfrica’s Economic Transaction Index (BETI) revealed a 5.9% decline in (electronic) transactions volume last month – the biggest decline in more than a decade;
  • Figures released by Statistics South Africa showed that manufacturing production fell 2.0% year-over-year in April, reversing a revised 4.0% gain in March, while economists had expected a 0.7% increase;
  • Statistics SA’s quarterly labour force survey showed that SA’s unemployment rate in the first quarter of 2015 was at its highest level since 2003 at 26.4%, with the more realistic expanded rate (including those who have given up looking for work now) stands at 36.1%, 1.5% higher than in the last quarter of 2014. This means that 8.7 million South Africans who were able to work, were unable to do so;
  • Trade union Solidarity’s Research Institute’s Employee confidence index, that measure job and wage security and sets 50 as the breakeven point between rising and falling job security, fell to 43.5 in the first quarter (Q1) of 2015, from 44.6 in the last quarter (Q4) of 2014;
  • Statistics South Africa latest report on gross domestic product showed that the country’s GDP grew by an annualised 1.3% in the first quarter of 2015, compared to 4.1% in the three months ending in December; and
  • The overall picture is probably best reflected in the latest Thomson Reuters/Ipsos Primary Consumer Sentiment or Consumer Confidence Index (“PCSI”) for May 2015 which was down 1.6% over last month. The monthly PCSI result is driven by the aggregation of the four weighted sub-indices: the PCSI Employment Confidence (“Jobs”) down 1.3 points; the PCSI Economic Expectations (“Expectations”) down 0.2 points; the PCSI Investment Climate (“Investment”) down two points; and the PCSI Current Personal Financial Conditions (“Current Conditions”) down 2.5% over last month.

The only exception to this trend was the Kagiso Purchasing Managers’ Index (PMI), which recovered by 5.4 to 50.8 index points in May on the April index of an eleven month low of 45.4 points. May was the first time since January the index was above the neutral 50-point mark.   

In the news

This picture is further darkened by news items like the international ratings agency deciding to cut the economic growth forecasts for South Africa, due to the ongoing crisis at electricity utility Eskom to 2.1% in 2015 and 2.3% for 2016 before it will lift to 3.1% in 2017.

Even the Minister of Finance, Nhlanhla Nene, in a reply to a question put to him in parliament, said the electricity crisis will shave up to 1% off the country’s GDP in 2015.

“Our estimates indicate that the electricity shortages as a result of electricity supply constraints will shave between 0.5 and 1% from annual real GDP growth in 2015. This has been accounted for in the 2015 Budget Review Forecast. Had electricity not been a binding constraint on the economy, real GDP growth could have ranged between 2.5 and 3% for 2015,” he said.


On the global front the World Bank warned last week that the developing world, of which South Africa forms part, could expect a bumpier ride in the year ahead. Its latest Global Economic Prospects report predicted that growth in Sub-Saharan Africa would slow to 4.2%.

Last week South African public-sector unions have withdrawn from a wage deal and threatened to strike after the government decided to “unilaterally implement” a lower pay offer, according to union officials. And the South African Municipal Workers’ Union (SAMWU) has formally declared a dispute with SALGA in relation to the salary and wage negotiations, which could also lead to a strike at local government level seriously impacting basic service delivery.

It comes against the background of a public-sector wage bill that has swelled by more than 80% over the last decade as annual increases averaged more than 6% above inflation. This is also in the face of government being pressured to rein in spending and curb costs as rating agencies flag possible downgrades amid claims that the wage deal wipes out government's R65 billion contingency reserve for the next three years.

Commentators

It is against this overall background of a South African economy apparently with its back to the wall that Stellenbosch historian, Hermann Giliomee, in an article on Politics Web, warned that the country might be heading for a fate similar to that of Greece. It might lose control over its own financial and socio-economic destiny.

“We may soon see the spectacle of both the world’s oldest democracy (Greece) and one of the youngest (South Africa) having to accept conditional aid (from the IMF) to help it address a grave financial crisis,” he wrote.

The Giliomee article came hard on the heels of another one on the same site in which  advocate Anton Alberts of the Freedom Front Plus suggested that the time might come “... that the IMF will itself have to intervene when the state collapses financially”.

Earlier, veteran author and political commentator, RW Johnson, speculated that government could be forced to ask for a bailout within the next two years.

Last week on Money Web, Andrew Mackie, investment analyst at Maitland, cautioned South African investors: “Mounting economic pressures with twin (budget and current account) deficits, high levels of unemployment and ailing power supply from Eskom contribute to discomfort amongst investors. These factors, combined with stretched valuations (a current JSE All Share P/E ratio of 21.12 relative to the 10 year average of 14.75), make local equities vulnerable to any international events that might trigger a ‘risk-off’ response, such as the first Fed rate hike.

“These concerns together with currency risk support the need for an element of diversification via offshore investing, especially in equity markets.”

This advice came right after a warning by economist Cees Bruggemans and political analyst Prof Willie Esterhuyse that corporate South Africa is increasingly spreading its wings beyond our borders. “By 2020 only a small minority of our quoted companies, but possibly also smaller businesses, will still be predominantly SA based or even SA owned. The dividend flows home will be rich to the extent these many businesses retain SA owners. But the fruit of their entrepreneurial abilities will have been absorbed by other societies,” they wrote.

What to do?

This stormy outlook on the South African economy is pretty much the dominant theme in the media at present.

About what can and should be done to change things around and/or fortify the country and oneself against the storm, we asked Heinrich Kruger of Kruger International for his opinion. To read his reaction click here.

by Piet Coetzer

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