Confidence-sapping in the era of a long downswing
Stark choices must be made to lift the economy out of a prolonged decline that has led to business cutbacks and investment withdrawals
SA’s recent economic performance has been gloomy in the extreme. With the current business cycle downswing already the longest on record, the need to turn things about is ever more urgent. And because the global economy is unlikely to provide the trigger, SA must create its own.
The current economic downswing started in December 2013. In that year growth peaked at 2.5%, and after consistently slowing in the subsequent years it is likely to be just 0.5% in 2019. This makes the downswing unique in three respects.
First is its duration. The average length of the seven downswings SA experienced between 1971 and 2013 was 29 months. The current one, at 66 months, is more than double that. Nor is the turning point seemingly close. The SA Reserve Bank’s composite leading economic indicator continues to drift lower, suggesting the downturn has yet to trough.
Second is its shape. Besides having been comparatively short-lived, most previous downturns were sharp. On several occasions they included harsh recessions, which forced companies (and consumers) to tighten their belts. Though such actions just made things worse, they helped unwind the excesses that had built up during the good economic times, and so laid the foundation for the upturn which soon followed.
During the 2009 global credit crunch, for example, SA’s real GDP contracted sharply, but after corrective action and with fewer economic imbalances as a result, the country quickly recovered, thanks mainly to the positive affect of huge global monetary easing, egged on by a resurgence in global growth and commodity prices. Domestically, further impetus came from falling interest rates, the Fifa World Cup and an expansive public sector wage bill.
But this time the downswing has been slow and protracted. Though there has not been a full-blown recession, growth has weakened continuously because 2013. And rather than swift but significant cutbacks, corporates have responded in waves, and the cumulative effect of these waves of adjustment is now severe.
Many firms were cautious in the early stages of the downturn, when GDP growth was slowing moderately, and there were hopes the economy would soon turn. In the face of deteriorating top-line growth, they have implemented measures to boost efficiencies and better control costs but have stopped short of wholesale retrenchments and asset sales.
However, as the slowdown intensified companies resorted to more aggressive action. And it is the compounding affect of this on the economy that is now beginning to be felt.
Take the latest labour statistics for example. In 2014 and 2015 formal sector jobs were still being created, yet in the two ensuing years growth eased noticeably just for firms to slash the headcount by 185,000 over the past 15 months. This flood of layoffs may also be a contributing factor to growth in employee compensation having halved from 8% in 2016 to 4% in 2018 — a historic low.
With little indication that the current downturn is about to bottom out, the danger now is that companies embark on yet another wave of cost cuts. It is crucial therefore that the economy’s slide is stopped in its tracks. But economies do not turn about on their own. They need a trigger. And even then, it takes time.
On past trends, if the Reserve Bank’s leading economic indicator were to turn today, SA would enter an upcycle in 12 to 15 months. For this to happen in 2020 we would then have to pull the trigger now. What will that trigger be?
Historically, it has mainly been an external one. This brings us to the third main feature of the current downturn, which is that it occurred during a phase of strong global growth. Now, by contrast, the country faces the prospect of having to engineer a U-turn domestically just as the global economy is heading into a slowdown.
When SA began its economic descent in 2013 the world economy was growing at 3.5%. In the ensuing years, however, the damage caused by a range of self-inflicted wounds — from strikes to state capture — more than countered the benefits that came with continued vibrant global demand. But growth in global trade is quickly waning and most commodity prices are coming off the boil.
Also, whereas previously the country gained from bouts of strong portfolio capital inflows boosting the rand, in turn creating the space for interest rate cuts, such inflows have turned into outflows, putting pressure on the currency. So, with limited scope to further ease monetary policy, it cannot be up to the central bank to provide the much-needed catalyst.
Nor can we look to fiscal policy. As it is the government is cash-strapped and there is no room for tax relief. If anything, the tax burden could climb even further. Simultaneously, ailing state-owned enterprises continue to consume a growing portion of increased borrowings, funds that otherwise could have been applied more productively elsewhere in the economy. The recently announced Eskom bailout puts our public finances in even worse shape than before, making austerity budgets more likely than growth-friendly ones.
If the trigger for the upturn is not going to be global, or monetary, or fiscal (or industrial policy for that matter), it must be political. Academic studies illustrate the importance of confidence and changes in expectations as key factors influencing swings in the business cycle. Simply put, when businesses and consumers are upbeat about the future, chances are good they will invest and spend more today.
Perhaps this is exactly the change in behaviour President Cyril Ramaphosa sought to achieve when he first emphasised the need for a “new dawn”. But this vision has not delivered the desired effect. After a spurt in confidence 18 months ago, sentiment has worsened. Private sector fixed investment continues to fall, and consumer thrift prevails.
The strategy document released by the finance minister on Tuesday reiterated the importance of key structural reforms to permanently lift economic activity and job creation. While these always have had the potential to turn about SA’s fortunes, the reality is few have yet been implemented by government.
But even worse than failing to implement growth-boosting reforms, which should be easy and quick to implement — such as easing immigration regulations, cutting red tape, auctioning spectrum and simplifying visa regulations — is the government’s apparent desire to fast-track the enactment of confidence-sapping policies such as expropriation without compensation, National Health Insurance (NHI) and the nationalisation of the SA Reserve Bank.
In this scenario the private sector will remain concerned about the future. In fact, what the government could end up triggering is not a spontaneous urge to invest and spend more, but a new wave of belt-tightening.
We are at a dangerous point in the economic cycle: the political choices have seldom been starker.
• Le Roux is chief economist at Rand Merchant Bank