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South African Economy on the path of growth

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The South African economy expanded an annualized 2.5 percent on quarter in the three months to June of 2017, ending two quarters of contraction and beating market expectations of a 2.1 percent rise. It is the highest growth rate in a year with agriculture, forestry and fishing making the largest upward contribution, namely field crops and horticultural products.

Agriculture, forestry and fishing jumped 33.6 percent, higher than a 23.1 percent increase in Q1. Additional upward contributions came from finance, real estate and business services (2.5 percent, recovering from a 1.2 percent decline in Q1); mining and quarrying (3.9 percent compared to 13.1 percent in Q1), namely coal, gold, manganese ore and iron ore and other’ mining and quarrying including diamonds; manufacturing (1.5 percent to -3.7 percent in Q1), mainly food and beverages, motor vehicles, parts and accessories and other transport equipment; electricity, gas and water supply (8.8 percent compared to -4.8 percent); transport and communication (2.2 percent compared to -1.6 percent in Q1); trade (0.6 percent compared to -5.9 percent in Q1) and personal services (1.1 percent compared to -0.1 percent in Q1).

In contrast, general government services decreased by 0.6 percent (-0.7 percent in Q1) and construction went down 0.5 percent (-0.8 percent in Q1), with falls seen in both residential and non-residential buildings.
Year-on-year, the economy advanced 1.1 percent, above 1 percent in the previous quarter and the highest annual growth rate in two years. Considering the first half of 2017, the economy advanced 1.1 percent.

The Growth Activators

Agriculture

Agriculture continued to show strong recovery from South Africa’s recent drought, increasing production by 33.6%. The rise in the second quarter was mostly driven by a rise in the production of field crops, in particular maize and wheat, as well as increased production of horticulture products such as vegetables.

South Africa is on track for record-breaking maize crops if production continues at estimated levels, according to figures from the Crop Estimates Committee (CEC). The CEC expects the country to produce 16.4 million tonnes of commercial maize in 2017, more than double the last year’s harvest, and higher than the current record of 14.7 million tonnes produced in 1981.

The bumper crop has already provided some relief for cash-strapped South African households. Higher stocks of maize and wheat have begun to dampen prices, with bread and cereal prices falling month-on-month for six consecutive months, according Stats SA’s most recent consumer price figures (February to July).

The Finance Industry

Reserve Bank of South Africa

The finance industry was the second largest contributor to GDP growth in the second quarter of 2017, growing by 2.5% on the back of higher activity in financial intermediation and auxiliary activities.

The Mining Industry

The 1970s are best remembered for disco, bell-bottoms, and the mesmerising lava lamp. It was also the decade that saw South African mining forge ahead in its influence on the economy and employment. How has the economy in general and mining in particular, shifted since then?

Mining’s contribution to total economic production climbed in the 1970s to peak at 21% in 1980. Contributing to the upward surge in 1980 was a relatively high gold price. In other words, for every R100 that the South African economy produced that year, R21 was due to mining. In 1987, employment in the industry peaked at just over 760,000 individuals.

Of course, mining is not the only industry that contributes to the South African economy. A different animal was the South African economy in 1980 compared with the economy that was in 2016, as shown in the graphic below.

Manufacturing was the largest industry in 1980, falling to fourth place as of 2016.

Mining was the second most influential industry in 1980, with its 21% contribution to the gross domestic product (GDP). In 2016, the industry contributed 8%.

Agriculture also slipped in ranking to fall from seventh to tenth place, contributing 2% to the GDP in 2016.

As the primary and secondary sectors of the economy waned, the tertiary industries took centre stage. The most notable climber was finance, rising from fourth place in 1980 to become the largest industry in 2016. Government was not far behind, rising in the ranks to take second spot.

Even though mining has lost some of its shine, it is still an important employer. The size of the mining workforce in 2015 was estimated at 490 146 individuals, according to Stats SA’s recent census of mining report. The PGM (platinum group metals) industry has the largest workforce, followed by gold and coal.

Coming into the second quarter of the year 2017, the mining industry has expanded by 3.9% on the back of increased production of coal, gold and ‘other’ metal ores such as iron ore and manganese ore. This is the second consecutive quarter of growth for mining, although production was more subdued than the 13.1% growth recorded for the first quarter of 2017.

Other notable features of the second quarter include positive growth in manufacturing (1.5%) after three consecutive quarters of decline and a strong rebound in electricity, gas and water (8.8%).

The 2.5% rise in GDP brings to an end South Africa’s second recession since 1994. However, there are a few statistical points to note. Firstly, quarterly growth rates can be quite volatile. Secondly, the headline figure of 2.5% is the growth rate after annualisation, in other words what the annual growth rate would be if the quarterly rate were to be repeated for four consecutive quarters. Thirdly, if we compare the first half of 2017 with the first half of 2016, the growth rate was 1.1%.

Although the headline figure is the most publicised, the key lesson is that it should not be used in isolation. There are other GDP indicators that complement the headline figure, and taken together they provide a more comprehensive picture of economic performance.

So even though 2.5% might seem like an impressive recovery, longer-term indicators show subdued growth. As a nation, the goal of achieving and sustaining higher rates of economic growth and development remains just as important as ever.

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South Africa

Eskom Crisis and Rising Unemployment– Woes of the South African Economy

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South Africa’s outlook has been dealt several heavy blows in recent times following Eskom’s financial results, and the latest unemployment data, which has raised the question: where to from here? South Africa’s unemployment rate climbed substantially in Q2 2019, StatsSA said on Tuesday, 30th July 2019.

The Quarterly Labor Force Survey for Q2 2019 showed that the unemployment rate increased by 1.4 percentage points from 27.6% in the first quarter of 2019 to 29% in the second quarter of 2019.

Eskom, meanwhile, reported a record loss for the year ended March 2019, of R20.7 billion, following years of corruption that has seen the power utility’s debt spiral out of control, fueling rumors that international ratings agency Moody’s could downgrade South Africa’s sovereign debt to junk status.

Analysts had hoped for a turnaround in fortunes following the election of president Cyril Ramaphosa, and post general elections in May. However, the country has been dealt one bloody blow after another, raising serious questions about its turnaround prospects and timeframe, which seems to get further away as both global and local financial institutions narrow economic growth.

Dawie-Roodt-Chief-Economist-at-Efficient-Group

The reason why the state’s finances finds itself in such a death-defying spiral, according to chief economist at Efficient Group, Dawie Roodt, is because, especially since 2009, state spending has increased relentlessly at a time when tax collections collapsed– mostly because of a faltering economy.

“At this rate of debt increase, it is very clear things will turn out very unhappy, very soon,” he said.

Roodt said “note that to fix the problem of collapsing fiscal accounts, a combination of three things needs to happen to stabilise the debt to GDP ratio.

“The first thing is that the economy should preferably start growing at a rate of 6%, at which rate the debt to GDP ratio will stabilise.

“Unfortunately, the ruling elite seems to be hell-bent on doing even more damage to the economy with all sorts of silly socialist ideas, like the suggested creation of yet another state bank, a new mandate for the SARB and the unaffordable NHI. Because of this, economic growth, believe me, will not save us from this fiscal cliff,” he said.

A second option is to increase taxes by the equivalent of 5% of GDP (current market price), which is approximately R250 billion. For example, VAT needs to increase by more than 11 percentage points to get this kind of money, or personal income taxes need to increase on average by nearly 10 percentage points.

This option, Roodt stressed, is irrelevant as a tax increase of this magnitude would have a huge adverse effect on growth, while overburdened taxpayers would likely revolt.

“Preferably, and the only realistic option left, is to cut state spending with a similar amount: R250 billion,” Roodt said.

“Percentage wise that is a real reduction in state spending of approximately 15%, or 20% in nominal terms. Now, show me the politician with the clackers to go and give COSATU the good news. But even if we could implement such austerity measures, the initial impact on the economy will be hugely negative – damned if you do, damned if you don’t,” the economist said.

Roodt also delivered a scathing assessment of president Ramaphosa.

“Judging from president Ramaphosa’s actions so far, he must either be weak, doesn’t appreciate the danger in which the South African economy is, or he simply doesn’t care,” Roodt said.

“I think we have a weak president that simply doesn’t have the political capital to implement unpopular structural changes. All that is left for him to do is to use (gutted) institutions, like the NPA, to do the heavy lifting for him. He is playing the “long-game”, but this economy doesn’t have a long time.

“Even if we can somehow wave a magic wand and get rid of all the corruption and incompetence in the state and SOEs overnight, the perilous condition of the state’s finances will need an extraordinary attempt to save us from further economic collapse,” Roodt said.

Roodt said that none of his three scenarios will likely prevent the inevitable: “Debt will continue to balloon, the economy will falter, poverty and unemployment will keep going up and those that are responsible for all the troubles will keep on blaming “the others” for their absurdities”.

“By then the only remaining alternative will be to inflate your debt away. But for that to happen you need to control the SARB – and with Lesetja Kganyago at the helm, that is not going to be easy. But be assured, as we sink further into this debt chaos the pressure on the SARB will become relentless and eventually also the SARB will buckle under the pressure. And then, inflation.”

“What we must understand,” Roodt said, “is that no structural adjustment, no new dawn, no fresh start can be taken seriously unless it includes an admittance that there are just too many trying to live off too few. Many tens of thousands of civil ‘servants’, including those at SOEs, are simply not needed. They must go.”

Economic growth– from bad to worse.

Early second-quarter indicators signal some respite following a sharper-than-expected contraction in Q1 due to rolling power outages. The retail sector picked up in April; car sales, on average, bounced back from the first quarter in April–May; while manufacturing activity grew at a faster pace, on average, in the same two months. Overall growth prospects remain bleak, however, with uncertainty over the restructuring of Eskom, the heavily indebted state-owned power utility, weighing on economic sentiment. Following slight upturns in April, the manufacturing PMI swung back into negative territory in May–June, and business confidence faltered again. The government is considering other measures to aid Eskom in addition to the ZAR 230 billion pledged, while minimizing the risk to public finances and credit ratings. Options on the table include swapping the firm’s sizeable debt for sovereign bonds or using a special purpose vehicle.

The International Monetary Fund becomes the latest key institution to slash its growth forecast for Africa’s most-industrialized economy, which may have fallen into its second recession in as many years. It now expects the economy to expand by 0.7% in 2019, half of what it estimated in in the beginning of the year, and similar to forecasts by the South African Reserve Bank and Bloomberg Economics.

The economy shrank the most in a decade in the first quarter of this year as the nation suffered the worst power outages since 2008.

The National Treasury, which forecast growth of 1.5% in the February budget, is expected to lower its prediction in the October mid-term budget. While the World Bank’s 1.1% estimate seems to be an outlier, it was published as part of its mid-year Global Economic Prospects outlook on the same day that Statistics South Africa released data showing a much bigger-than-expected contraction for the three months through March. South Africa is stuck in its longest downward business cycle since 1945, data from the central bank showed in June.

In all, growth is seen decelerating this year as persistent power outages continue to weigh on economic sentiment and curb investment and private spending. That said, a pickup in export growth should cushion the slowdown. Downside risks to the outlook stem from policy uncertainty surrounding Eskom’s debt restructuring and President Cyril Ramaphosa’s reform agenda.

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