Subpar growth in the first half of the year suggests that SA’s long-awaited economic recovery has stalled. On the other hand, growth could still bounce back.
Which is it? That depends on who you talk to. Economists are divided. The most bullish believe growth could average about 2% for the year; the most bearish expect it to languish nearer 1%.
The August Reuters consensus among 30 economists is for growth of 1.4% this year, rising to 2.2% by 2020. But the consensus is likely to drop precipitously following the shocking revelation, as the FM went to print, that the economy is in recession. Second-quarter real GDP growth contracted by 0.7% against expectations of a 0.6% rebound.
Nedbank chief economist Dennis Dykes is among the most bearish, expecting real GDP growth of just 1% for the year as a whole — and this was before the Q2 GDP data came out. He says the mood in SA is very negative, mostly because of a lack of policy direction, particularly around the mining sector and the ANC’s undertaking to expropriate land without compensation.
"While there have been some good moves in terms of improving the governance of state-owned enterprises and making changes at the prosecuting authority and revenue service, there’s still a lot of damage to sort out," he says. "This will take time [and] is holding the economy back."
Dykes gives the government a big tick for the new Integrated Resource Plan (for SA’s electricity mix) and for scrapping the Minerals & Petroleum Resources Development Amendment Bill, but feels the policy environment hasn’t really improved yet. "If the government lifted some of the policy constraints there’s absolutely no reason why the economy couldn’t grow faster," he says. "Unfortunately, every policy instinct seems to be the wrong one from an investment-encouraging perspective."
Dykes believes the difference between his forecast and the bullish ones is that many expected rising business confidence as a result of Cyril Ramaphosa’s election as president to spur fixed investment immediately, creating jobs and boosting demand in a virtuous cycle.
He disagrees with this view, as employment and fixed investment are lagging indicators, not leading ones. In other words, only after demand has climbed and firms have run at full capacity for several quarters do they start to invest and take on new staff.
Moreover, at 11%-12% of GDP, private fixed investment is not exceptionally low. Firms are not underinvesting for this stage of the cycle but are behaving normally. And with capacity utilisation running at 81%, there’s no pressure on businesses to make new expansionary investment.
But Dykes does expect growth to climb up to 2.2% in 2020. This assumes there will be no international crisis or SA election surprise in 2019, that the ANC wins on a reduced majority but doesn’t get forced into a coalition, and that Ramaphosa gets a clear election mandate to govern and policy becomes more balanced.
Standard Chartered chief economist Razia Khan is among the most bullish forecasters, expecting 1.8% growth this year, rising to 3% by 2020 — though her forecast too will have to be revised given the latest GDP numbers. "The key thing for me, despite everything that’s been going on in the political arena, is that SA households have been steadily de-leveraging.
"That may be behind the robust turnaround in household spending we saw from September last year," she says.
As to whether SA achieves 3% growth by 2020, Khan’s most important test for this will be whether the private sector can create sufficient employment to compensate for the potential decline in public sector jobs as the government is forced to reduce its headcount.
Another vital consideration will be the extent of household debt and whether it will depress household consumption, especially among public servants who went on an unsecured lending binge in 2010/2011.
Khan is optimistic about the potential of fixed investment to drive SA’s growth recovery. And she does not detect a mood of impending doom over land reform. On the contrary, she says: "Many South Africans see the issue as an economic imperative that has to be addressed given SA’s high levels of inequality." Given the potential for inequality to ignite populist responses, she believes that any attempt to deal with the land issue sooner rather than later will generate economic certainty and improve long-term prospects.
"In February there was an assumption that everything would be done in a business-friendly manner. Now we see doubts creeping in. But if SA can create opportunities for people who’ve been locked out of the economy, it’s difficult to see how it couldn’t be growth positive," she says.
The big question is whether SA can implement the measure in a way that is transparent and doesn’t damage investor confidence. The bearish would say it has already diminished confidence.
Khan believes a positive outcome may still be possible.