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As SA tries to engineer an economic revival, improving the country’s growth rate is becoming increasingly critical, and it hinges on revitalising key components of the economy. Stanlib has compiled a list of 12 key indicators to which it is paying close attention and scoring monthly to assess if SA is making meaningful progress towards an economic turnaround.

The ranking began in January following the election of Cyril Ramaphosa as ANC and South African president, and the ensuing "Ramaphoria". The 12 indicators focus on a range of variables including political stability, policy clarity, business confidence, employment, capital expenditure, housing activity and consumer income.

June analysis

SA’s economic turnaround score was a disappointing 42% in June 2018. This compares with a score of 44% in May, 46% in April, 43% in March, 40% in February and 33% in January.

The June outcome was hurt by a decline in business confidence, weakening exports, a higher petrol price, and a further drop-off in the manufacturing purchasing managers’ index. The score of 42% is consistent with the expectation of still-modest economic growth in 2018, but is below earlier expectations that the score would move steadily higher each month, rising convincingly to above 50% towards the end of 2018.

Hopefully the lack of gross domestic product performance turns the attention on understanding what is required to change for SA to achieve meaningfully higher economic growth and employment.  

How Stanlib scores:

Every month, each indicator is scored on a scale of one to 10, with 10 indicating an extremely high level of vibrancy and one suggesting extreme underperformance. The scores are then averaged across all 12 variables to derive the overall progress level (reflected as a percentage), which Stanlib will analyse.

Picture: SUPPLIED/STANLIB
Picture: SUPPLIED/STANLIB

Is SA on the right track?

Picture: SUPPLIED/STANLIB
Picture: SUPPLIED/STANLIB

Lifting SA’s growth rate to above 3% on a sustained basis will require significantly more effort than is evident, including the coordination of policy efforts across key government departments. There is a risk that the consumer confidence index showed excessive optimism during Q1 2018.  

In Stanlib’s view, these challenges can be broken down into five main categories:

  • uplifting business confidence to stimulate private-sector fixed investment;
  • restoring fiscal discipline and avoiding further credit-rating downgrades;
  • reforming state-owned enterprises;
  • ensuring clear and consistent transformation policies; and
  • reducing the extent of corruption in both the private and public sectors.

Despite initial optimism that the political changes, which occurred in December 2017, would quickly lead to signs of an economic revival, SA’s economic performance has been disappointing in the first half of 2018.

However, some of the country’s high-frequency economic data improved in Q2, including the May retail and manufacturing data, but this improvement remains modest. In this regard, the South African Reserve Bank opted to revise its 2018 gross domestic product forecast from 1.7% to a mere 1.2% last week.

It is encouraging that consumer confidence rebounded sharply in Q1 and remained elevated in Q2. Household income is expected to continue to rise by more than inflation (mainly because the average increase in wages remains above inflation, especially government), and interest rates are still expected to remain relatively low. The net result is that growth in retail spending is expected to remain positive in 2018, but will probably struggle to gain momentum unless there is a sustained increase in employment.

Unfortunately, a number of key policy issues continue to weigh on investor and business sentiment, including key aspects of the proposed mining charter, the possibility of land redistribution without compensation, and the impact of the government’s initiative to introduce the new system of National Health Insurance, including how this initiative will be funded. There is a risk that economic policy becomes more populist as the country moves closer to the 2019 national elections.

Another important area of concern is the deterioration in SA’s current account, which recorded a shock deficit in the first quarter of 2018 that was equivalent to 4.8% of gross domestic product. This compares with a deficit of -2.9% of gross domestic product in Q4 2017. Crucially, SA has been unable to sustain the trade surplus that persisted throughout 2017, mainly as a result of a very substantial fall-off in exports.

About the author: Kevin Lings is Stanlib chief economist. Picture: SUPPLIED
About the author: Kevin Lings is Stanlib chief economist. Picture: SUPPLIED

Understandably, there is also a concern that the most recent decline in SA’s exports could intensify if the current increase in global trade protection leads to a slowdown in global trade. While this effect might be partially offset by recent rand weakness, it does highlight that SA remains extremely vulnerable to changes in global economic activity.  

This implies that the rand remains vulnerable as foreign capital flows adjust to a world of rising developed market interest rates, unresolved structural weaknesses in the euro area, increased global trade protection, more modest world economic growth and increased vulnerabilities in a number of key emerging markets.

This article was paid for by Stanlib.

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