In the space of a week SA’s optics have brightened: the economy is 11% larger than previously thought, the debt ratio has dropped from the low 80% range to the low 70% range, and the budget deficit is likely going to beat the National Treasury’s target this year, despite all the additional unrest and pandemic-related spending.
This upgrade is a result of Stats SA’s GDP rebasing and benchmarking review — a routine statistical exercise that is normally undertaken every five years. By applying new methodologies, more precise categorisation and improved coverage, in line with international best practice, the exercise usually finds that we’ve been underestimating the size of the economy. But this time around the upward revisions are two years late (mainly because of Covid-19) and particularly large.
Of course, they are most welcome in that they improve SA’s fiscal metrics (both the debt and deficit are expressed as ratios relative to nominal GDP) at a time when the country is straining at the bounds of fiscal sustainability. But the revisions do not change the underlying ability of the economy to generate tax revenue to service its debt. The debt level also remains the same in rand terms, and the debt ratio is still on a rising trajectory.
Also, the economy’s growth rate over the past 10 years is not much changed: SA’s is bigger but it’s not growing any faster on a trend basis. More worrying is that the drivers of growth have become skewed in an unhealthy direction: the economy is even more consumption-focused than previously thought, while the contribution of fixed investment is even smaller.
In other words, SA’s growth is becoming increasingly dependent on consumption by households rather than on investment by firms. This is not a good thing. Of the R536bn uplift to nominal GDP in 2020, R459bn (82% of the total) came from an upward revision to household consumption expenditure with its share of GDP consequently rising from 60% to 62%. Meanwhile, gross fixed investment spending, which is critical to growth, was revised downwards by R26bn for 2020, taking its share of GDP down from 15.8% to just 13.7%.
This is the lowest level in at least four decades and is extremely worrying given that countries that have managed to sustain rapid growth have typically boasted fixed investment ratios of 25% of GDP or more.
Granted, SA’s dismal fixed investment performance reflects behaviour during the pandemic when many businesses weren’t even operating, let alone investing. However, the downward revisions apply to previous years as well. From 2015 to 2020 the new estimates of the level of fixed investment are on average 3.8% lower than previously, taking the fixed investment ratio down from an average of 18.4% of GDP to 16.1% over this period.
Reserve Bank deputy governor Kuben Naidoo expressed concern over SA’s low rates of fixed investment last week — which he ascribes mainly to weak business confidence, given the close correlation between the two variables. And since private fixed investment is an important leading indicator of economic activity, a lack of it will act as a handbrake on the pace of growth and job creation into the future.
Creating jobs has never been more important. SA’s official unemployment rate leapt from 32.6% to 34.4% between the first and second quarters as 54,000 more jobs were shed. Roughly 1.4-million more people are out of work than before the pandemic. This is disastrous.
So, while SA has been handed a bit of breathing room through the lucky combination of a commodity boom and the rebasing windfall, the country continues to bleed jobs and its deeper economic fundamentals are increasingly out of whack.
If there is one metric SA should be fixated on it’s not the size of the economy or the debt ratio (which are both looking better) but the rate of fixed investment and its corollary, business confidence (which have never looked worse). The place to start is by repairing business confidence, one pragmatic, progrowth reform at a time.
• Bisseker is a Financial Mail assistant editor.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.