How are we doing...really
Last week, the Economist ran a critique of gross domestic product [“GDP”] and concluded that it is a poor measure of prosperity and an unreliable gauge of production. They suggest including service quality, increased choice and unpaid work in a list of ways to capture production and living standards more accurately. The Economist calls this improved metric “GDP-plus”. In response we’ll explore alternative data and anecdotal information to assess the state of the South African economy. I’ll resist the temptation to call this approach “GDP-minus”.
What do the experts say?
The International Monetary Fund [“IMF”] has just released its Regional Economic Outlook for Sub-Saharan Africa; “Time for a Policy Reset”. The IMF believes that low investor confidence, tighter policies, declining commodity prices and drought will cut growth in South Africa by half; but that it will still be positive. The IMF are also the most pessimistic of the big forecasters.
The table below summarises estimates for GDP at constant prices (real GDP). Where possible, I have provided the percentage point change to the institution’s estimate from roughly 6 months earlier in brackets.
…and what does Beti think about all this?
The BankservAfrica Economic Transaction Index [“BETI”] measures South African interbank payment system transactions smaller than R5 million and is tightly correlated with the Reserve Bank’s co-incident indicator. BETI gives a good indication of what GDP will be one quarter ahead and has the advantage that it is released shortly after the end of each month. March is up 0.4% on February and 0.8% on the previous year. The timing of Easter and public holidays complicates interpretation, but the numbers suggest that “modest growth is still supporting the economy”. Interestingly, although the number of transactions is up on last year, the average value of those transactions declined by 1.1% (even including inflation). BankservAfrica also cautions that there is still a possibility of a decline in GDP in 1Q16.
Other data is also muted. Total new vehicle sales in April 2016 were down 9.2% on last year. Medium commercial vehicles (-24.3%) and cars (-13.2%) were the worst performers, while light commercial vehicles (-0.1%) almost held up. On the housing front, the FNB house price index for April recorded a 6.4% year on year increase. However, this means that there has been no real increase in house prices because consumer price inflation is also above 6%. FNB Valuers also perceived weakening demand for residential properties in April.
What’s the word on the street?
Unfortunately, the anecdotal evidence suggests that the economy is doing worse than official data shows.
“A woman will come in covered in diamonds and jewellery. When it comes time to pay… the first credit card will be declined and then the second; finally the third card will go through” – Rory, hair stylist
Rory runs a salon in an upper-middle class area of Johannesburg. He says that his business is fairly defensive because, as he puts it, “hair grows no matter what the economy is doing”. He has however seen a change in his customer’s buying behaviour that he thinks is a signal that the rest of the economy is under strain.
“There has definitely been a dip” – overheard at Slow in the City
Slow is a flexible workspace opposite the Gautrain Station in central Sandton. There are around 30 desks and eight meeting rooms. The venue is a popular base for business people who have flown into Johannesburg for the day and for businesses that want to do offsite meetings. This time last year the desks were packed with entrepreneurs watching TED talks and meeting rooms needed to be booked at least a day in advance. Right now I have the restaurant all to myself. The biggest drop off has been in bookings for the large conference rooms which are popular for corporate training and product launches.
The photo is from Melville, in Johannesburg. The bohemian suburb is a fairly sensitive indicator of the state of the economy. Posts on the Lonely Planet website from 4 years ago described Melville as “one of the best places to bar-hop in Joburg” and “a nice little neighbourhood”. At the moment it’s looking tacky and unloved. A recent post on a different website had the title “not what it used to be”. That quote and the many vacant shops sum things up.
Where to from here?
The South African population is growing at around 1.6% per year. This means that even if we do achieve the GDP growth forecasts above, South Africans will be worse off as individuals unless the economy grows faster than 1.6%.
The IMF groups SA with the sub-Saharan African oil exporters (Angola and Nigeria) and non-energy-commodity producers (Ghana and Zambia) due to our poor growth performance. It would be much better to be like the other oil importers (Kenya, Cote d’Ivoire, Senegal) who are growing in excess of 5% and whose economies are supported by on-going infrastructure investment and strong private consumption. This is not simply a case of blaming commodity prices because net commodity exports in SA are approximately 5% of GDP (we export platinum, iron ore, gold and cold, but import oil) vs. around 60% in Angola, Zambia 18% and Nigeria 15%.
It is critical that South Africa improves its growth outlook regardless of whether you frame it in terms of GDP, GDP-plus or even GDP-minus. I have written before that unavoidable external shocks (the drought, China slowdown, rising US interest rates) have been made worse by self-inflicted missteps (e.g. Nenegate, the Guptas, not declaring the drought a national emergency). Maybe it is time for a “Policy Reset”…or another World Cup.
(The Economist, IMF, World Bank, South African Reserve Bank, Fin24, BankServAfrica, National Association of Aumobile Manufacturers of South Africa, FNB, Trading Economics)
Dr Andrew Louw CFA