SA’s second-quarter GDP figures were shocking. It will take many years just to get back to the 2019 level of GDP, and if government does not accept that profound structural reform of the economy is essential in achieving sustained economic growth, then the process will take even longer. Additionally, the likelihood of continuing rolling blackouts will throttle any growth that might otherwise be achieved.
One point to clarify is the definition of GDP movements and thus the extent of the GDP collapse in the second quarter. The most widely publicised and in fact highlighted on the front page of Stats SA’s own release, is the quarter-on-quarter annualised figure of -51%. This measure assumes that the actual quarter-on-quarter decline will be perpetuated for the next three quarters to arrive at the sensationalist figure of a 51% contraction.
A more meaningful figure would be the year-on-year percentage change in GDP between the second quarter of 2020 and the second quarter of 2019. This figure was a much milder -17.1% and of similar magnitude to the year-on-year contractions in Italy and Malaysia and slightly better than Mexico, France and the UK. India at -23.9% and Peru at -30.2% were the hardest hit global economies in the second quarter of 2020.
In actual GDP, the figure achieved in the second quarter is approximately the same level as in the second quarter of 2007. Any growth since the last global financial crisis of 2007/2008 has been wiped out.
There is likely to be some growth in the third quarter, albeit from the extremely low base of the second quarter. Beyond that it becomes difficult to make any meaningful forecasts.
It will be of no help to simply apply traditional monetary and fiscal policy. Interest rates are at historic lows and offer little if any relief that might conceivably act as a growth catalyst.
By common consent, taxes are going to have to rise significantly to reduce the yawning revenue shortfall, currently running at about R300bn. The government debt to GDP ratio is about 80% and rising, with some estimates putting it well over 100% in the next few years. Then add into this toxic brew the likely effect of further rolling blackouts, estimated to cost the economy at least R1bn/day at stage 1 of load-shedding.
Eskom CEO Andre de Ruyter made it clear that so-called “philosophy maintenance” is required on the utility’s ageing plant, whereby power stations are taken offline for up to three months in certain instances to bring them back to original equipment specifications. This enhanced planned maintenance coupled with high breakdown rates will inevitably result in further widespread rolling blackouts for at least the next two years and probably a lot longer.
Theoretically at least, many of our challenges can be addressed. The Eskom situation can be easily and quickly fixed, simply by allowing the private sector to construct and operate gas and renewable plants and sell directly to end users, bypassing Eskom in the process. However, deeply ingrained state-control orthodoxy is part of ANC ideology, so do not expect any movement on this front for some time, regardless of how perilous the situation appears. The SAA debacle endorses that view.
The unemployment situation can be greatly improved by instituting a comprehensive infrastructure plan, mainly funded by the private sector. This would also result in sustainable growth, provided it was tightly managed and out of the hands of government.
A thornier issue to be tackled in forthcoming budgets will be how to reduce the payroll for SA’s excessively bloated political service. Merely reducing salary increases will not suffice. Deep cuts will have to be made in actual numbers of people as well. While finance minister Tito Mboweni appears to be up for the challenge, many of his colleagues in the ANC and the tripartite alliance will resist it strongly.
One wonders how bad things need to get for realpolitik to really grab hold.
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