facebooktwitterlinkedinyoutube

Why haven't we been sunk yet?

Why haven't we been sunk yet?

There is something very intriguing about our condition. Why with so many severe headwinds haven't we been more properly sunk yet? Why do we keep showing growth of 2% with inclinations of wanting to talk it up to 2.5%-3% while a more appropriate stance would be a funeral and burial of -2%?

This involves a lot of "on the one hand and on the other."

As an Indian investment banker once told me, if you are supposed to be able to do 15% growth, 7% is pedestrian (and 4% a disaster). That illustrates both potential and what severe headwinds can do to you.

What is our potential?

If the long-term average is 3.5%, the NDP (the National Development Plan) claims we can do 5%. Frankly, that looks like an ambitious number while not wanting to lose credibility. Really ambitious would be 7% but then we are no longer a young, low productivity Hun quite capable of boosting productivity levels to that extent (although when I look at the public service, but also around me, I kind of wonder).

Yes, just over half the potential labour force (unemployed, discouraged, informal) is not fully economically mobilised. So if we had the right policy mix, and bearing in mind our fast growing Africa hinterland, along with all our own huge infrastructure backlogs, we could sustain really high growth rates for awhile before running out of runway.

But institutionally we have moved well beyond that point, and it doesn't help matters to start dreaming, wanting to be what you are not.

This does not mean, however, that a slightly more mundane ambitiousness may still be doable, and that frankly is the NDP, realistically ambitious. So don't pitch 3.5%, as we can do better than that, though don't raise your sights too far beyond it either.

This, however, remains all talk. We are not close to doing 5%. Instead, we are genuinely struggling to clear the bar at 2%.

Why?

To achieve a high growth rate, your fuel needs to get into the engine faster and your spark plugs need to be firing just right. Anything slowing things down or messing up the synchronization prevents a fast enough joining of new labour inputs, new capital (investment) inputs, or simply slows down the decision making or limits the size of new ventures being contemplated.

Here we counter the usual suspects of modern times, that were long not even present when a mere 3.5% growth rate (the long-term average) was our goal.

Ever since early 2011, the world commodity supercycle gave the ghost (blew a gasket), with our Dollar export prices starting to decline steadily, and this sliding continuing to this day.

Irrespective of Rand movements (that govern export AND import prices), lower Dollar prices means less of a bonus to the country. The bonus built up this way had been huge during the 2000s decade, explaining some of the ease by which national income rose at the time. Now the reverse operates, relentlessly, impoverishing imperceptibly but very readily.

Then there is electricity. By keeping electricity supply flat, and raising tariffs, we could squeeze some unnecessary flabbiness out of our energy use, but that already for a long time no longer weighs up against the way we have been cutting real muscle tissue.

Telling large industrial users to switch off means lost output. Relentlessly raising tariffs to them makes existing operations less profitable. This, and uncertainty about what looms, inhibits large dollops of expansion. It invites stagnation.

Large parts of mining and manufacturing are affected, but electricity is used much wider, and has this impact. Starvation diets naturally put a limit on how much an economy can expand. That constraint resides around 2%-3% growth.

Having one of these major strategic constraints is bad, but we doubled up on that by creating a second major one right alongside it.

Credit availability (and cost).

When we started coming out of recession in mid-2009, it didn't take long to realise that household mortgage lending had gone missing in action. Both banker and regulator (and the most heavily indebted) had decided that the previous model had to change. Less risk, more own capital at risk, deleveraging.

It meant that the level of outstanding mortgage loans would grow much slower than inflation, effectively starving the property market and new building trade.

An economic recovery with property and residential building activity missing in action is like an engine with only half the pistons working.

For a brief moment, another part of the credit spectrum (unsecured lending) flared up, bolstering certain types of household and consumer spending, but it could not last before it too fell victim to greater risk scrutiny, helped along with our mining troubles and the garnishee imbroglio observed there.

As long as five years ago, Erwin Rode (Rode & Associates)and Charles Martin (BER) during investment reviews expressed the view that anemic mortgage lending would keep the GDP growth rate down to 3% or less.

With two of such key critical constraints (electricity and credit) imposing themselves on different parts of the economy, the combined headwind was even more impressive than the impact they could have on their own.

A relatively small problem was imposed by organised labour, going on strike in well published campaigns with only 100 000 or thereabouts employees at a time, which in a 14 million employee economy should not be particularly noteworthy.

Yet the numbers don't quite work this way. There are forward and backward linkages, causing product shortages, and lost output and sales. Also, there is the intimidation factor, as businesses absorb this message, and become far more defensive in a far wider context.

It may inhibit new investment plans sufficiently to keep the GDP growth rate back. With business confidence unable to rise much on a sustained basis above 40% (only 4-in-10 confident) at a time where we should be seeing 60%-80% readings as a matter of course, this says much about the general climate.

To this we can add the many ways in which government can dream up well-intentioned new regulations, but these often coming at a cost. If the burdens so imposed become ever meatier and cannot easily be passed on, its impact tends to reinforce inhibition. Do less rather than more.

Making things worse, and easier to keep the home front on the back burner, are the plentiful opportunities nowadays of better growth opportunities elsewhere when companies are in any case strategically committed to regionally diversify.

These are some of the major drag anchors keeping us back and suppressed at present. Also preventing a more massive policy boost to the growth process is the failure to achieve a faster infrastructure rollout. The backlogs are real, the plans exist, the finance can be raised, but the organizational or technical flair isn't always there, known as a public sector capacity problem.

All of these combine to set the mood music, to offer active headwinds, to fail in providing tailwinds where these are possible. It translates into round numbers, and it isn't 7% or 5% or 3.5%.

Instead, household consumption is doing about 2%, government consumption is being restrained by budget caps to about 2%, fixed investment is doing about 2% and net trade should be doing a lot more, with imports being restrained on the consumer side, and world growth and weak Rand boosting exports, but when the juice isn't there, the labour is on strike or the courage fails you to put new plans in action domestically, only 2% may be on offer there too.

We can do much better, as per the NDP and common sense, but we must also want it, mainly by systematically spiking these many drag anchors, become more proactive on infrastructure, and otherwise become lucky again regarding world performance and commodity windfalls.

Meanwhile, there is the wonder, among so many major drag anchors, that the economy can still squeeze out 2% growth. It is indicative that in many instances we have quality labour, quality physical assets and quality business managers to still produce growth even under the most unpromising circumstances. Such quality remains our main hope, over time even overcoming the most pernicious of the present drag anchors.

It can be done, perhaps a matter of time, as always, as the pendulum swings. But we may be older by then.