As the sun rises on 2014, a debate is taking shape about whether South Africa will achieve the 3% gross domestic product (GDP) growth rate that has been forecast by the Reserve Bank for the year.
But the debate could be clouding a larger, more important argument — that, in order to achieve real growth this year, South Africa must increase its GDP not by 3% but by much, much more.
In light of last year’s dismal 1.9% real GDP growth rate, most analysts agree that 3% would be welcome. But economists are becoming increasingly sceptical about the country’s ability to achieve it.
Most predictions range between 2.5% and 2.9%, with the upper figure forecast by the International Monetary Fund and the lower figure being forecast by the likes of Sanlam Investment Management investment economist Arthur Kamp and Nomura’s emerging markets economist Peter Attard Montalto.
And analysts warn that even if we do achieve the 3% it is still significantly lower than what the country needs in order to see any real growth and reduction in unemployment.
“It shows a poverty of expectations — the thought that the underlying economy is so weak that we get so excited about 3% or not,” Attard Montalto said.
“You need more like 3.5% to stabilise the underlying unemployment rate. And to actually reduce the unemployment rate, you need [a GDP growth rate of] between 5% and 6%.”
The National Development Plan, touted as the blueprint for economic growth since its introduction in late 2011, calls for an annual GDP growth rate of 5.4%. Real growth has significantly undershot this. In the year the plan was introduced, South Africa’s GDP grew by 3.1%.
In 2012, it grew by 3.5% and last year’s figure dropped to less than 2%.
Against this backdrop, a 3% growth rate would be “pretty good progress”, said Kamp, adding that it would be take a push to achieve that target. Nevertheless, it would still fall “materially” short of the goals set by the NDP.
If an average annual real GDP growth rate of 3% was maintained between 2011 and 2030 (the duration period outlined by the NDP), the real GDP would grow 1.7 times over the period, Kamp said. In contrast, if the NDP growth targets of 5.4% a year were achieved over the same period, the real GDP would grow 2.7 times. To grow the real GDP 1.7 times over 19 years would still be “a big improvement”, he said, but “we would like more”.
South Africa’s sluggish growth has been attributed to several factors. Chief among them is the double debt faced by the government: a widened trade deficit and a current account deficit of 5.5% of GDP.
State reaches capacity
The government is taking steps to mitigate this by slowing down its spending. “The state has reached capacity,” said Attard Montalto, and the knock-on effect is less real spending by the consumer.
A slowdown in unsecured lending by banks has underscored this.
The country’s position has been further weakened by its heavy dependence on foreign inflows to service the debt, a situation in which “the rate of return on capital is simply not high enough to get investors to invest”, Kamp said.
The threat of unreasonable wage demands and industrial action remain a real barrier to investment, and strikes in the automotive sector last year were one of the key factors responsible for the downward adjustment of economic growth.
The rand has dived to new lows, reaching a five-year weakness against the dollar at 10.76 on Monday.
Simultaneously, South Africa remains highly exposed to the global economy, which is likely to be only slightly better than last year’s. Considering these factors, are the growth objectives set out by the NDP unrealistic?
Current business cycle not conducive for growth
According to Kamp, for the current economic climate, yes. “The way we are going about things at the moment, I sincerely doubt we would get 5.4% growth rate [in the medium term],” he said. “The current business cycle is just not conducive for growth.”
The missing factor in today’s business cycle is productivity, Kamp said.
“In the previous business cycle, we had the highest investment to GDP ratio; we had the first employment growth in decades,” he said.
“[In] this cycle, we have weak productivity, growth led by consumption and the government debt is the highest percent of GDP ever … The big difference between this business cycle and the last is productivity.”
Given the local and global headwinds faced by the country, analysts say that only drastic policy measures will provide the catalyst needed for true growth.
According to Attard Montalto, the emphasis that the NDP places on infrastructure development for economic development “is actually just maintaining potential growth”.
More dramatic reforms needed
Instead, “you need actually much more dramatic reforms” to effect real growth — things such as the removal of the wage cycle and minimum wages and a more relaxed policy on foreign direct investment.
“Most of these things are unforeseeable,” he said, which is why he and many other analysts are limiting their expectations for growth.
But the outlook isn’t all dismal. In his book, The Long View, economic analyst JP Landman points out the significant economic progress the country has made under democratic rule.
In the 16 years before demo-cracy, GDP was only 1.55% a year, but this increased to 3.3% in the 16 years after democracy. Overall, labour productivity increased post-democracy as well, according to Landman.
“If we go back to 1970, we see a clear trend over a 40-year history. Between 1970 and 1995, labour productivity increased by less than 1% per year. Then, suddenly, from 1995 onwards, it started to increase way more than 3% per annum.”
However, since the 2009 recession, productivity waned to less than 2% a year. “Clearly, we have to reverse this trend again,” he said.
Whether the government makes the radical changes called for by some analysts to effect this remains to be seen.