By Thebe Mabanga
The South African consumer has emerged as the unlikely hero, propping up faltering economic growth as mining, trade and manufacturing struggled, while net exports fell and imports surged.
But the grim economic figures have again put President Cyril Ramaphosa’s economic reforms in focus, and neither those on the economic left nor those on the right of his reform agenda agree that the chosen path will yield the growth and employment the country so desperately needs.
On Tuesday, Statistics South Africa reported that, after six consecutive quarters of growth, gross domestic product (GDP) fell by 0,2% in the second quarter of this year after growing by 0,4% in the first quarter. This was expected and was caused partly by the energy price shock triggered by the war in Iran.
A worrying feature of South Africa’s poor growth is that three sectors that produce actual goods and have job-creation potential – mining, trade and manufacturing – performed poorly.
Mining fell by 3% at a time when South Africa’s platinum mines are reporting record profits. This means these profits are being driven by higher prices, not higher volumes. The trade, catering and accommodation industry contracted by 1,9%, with decreased economic activity reported in wholesale trade, motor trade, and food and beverages.
Stats SA noted that the manufacturing industry recorded its third consecutive decline. Seven of the 10 manufacturing divisions recorded negative growth rates.
Nedbank credits the South African consumer with firming up domestic demand as net exports fell due to higher imports.
“Growth in domestic demand was driven by stronger consumer spending and renewed inventory accumulation. Government consumption spending also increased, while fixed investment declined by less than it did in the first quarter,” the bank said.
Household consumption expenditure picked up from no growth in the first quarter to 0,4% in the second quarter. Details of the spending will only be available later this month in the Reserve Bank’s Quarterly Bulletin.
Nedbank points out that consumer finances remain relatively healthy, supported by positive real income growth, continued withdrawals of retirement savings and relatively low interest rates.
“However, the pressure from the surge in fuel prices and the acceleration in inflation caused by the war in Iran was visible,” the bank said, pointing to the FNB/BER Consumer Confidence Index falling from -7 to -19.
It said durable goods and services led the increase, with durable goods spending rising by 1,3% on the quarter and 8,8% on the year.
This was “likely propped up by relatively robust demand for vehicles and household equipment, driven by highly attractive prices as more Chinese and other low-cost producers aggressively entered the local market”.
Services rebounded, growing by 0,6% on the quarter following a contraction in the previous quarter.
“The increase reflects growth in outlays on recreation and culture, education, restaurants and hotels, and miscellaneous services,” Nedbank said.
So consumers, supposedly cash-strapped and highly indebted, still somehow managed to use their two-pot withdrawals, salary increases and bonuses, and what little they could borrow, to buy cars and fridges and go on theatre dates and short holidays. Just as Asia’s consumers carried the global economy to recovery after the global financial crisis, South African consumers are proving to be the local heroes this time around.
One of the most important policy undertakings by the South African government since Covid has been the implementation of economic reforms through Operation Vulindlela, driven by the Presidency and National Treasury. These reforms had been mooted for close to a decade by the private sector, ratings agencies and right-leaning free-market economists. In all that time, no one quite said what they would look like.
They were finally introduced as part of the Economic Reconstruction and Recovery Plan, with Operation Vulindlela unveiled in November 2021.
The reforms, implemented so far in energy, transport and logistics – especially rail – water and now the municipal sector, are beginning to bear fruit. These include third-party access to the rail network, opening the electricity generation market to the private sector, introducing some competition for Eskom, unbundling the utility and restructuring the transmission sector.
The reforms appear to be bearing some fruit, most notably by helping South Africa secure credit-rating upgrades for the first time in almost two decades.
But the reforms have also become contentious, much as the late-1990s Growth, Employment and Redistribution policy, known as GEAR, and the budget reforms that accompanied it became known among the left as the “1996 Class Project”.
Those who advocate for reforms believe that we need more, not fewer, while those who oppose them believe they are the cause of the current economic crisis.
Nowhere was this divide illustrated more clearly this week than in the reactions of the Democratic Alliance and the South African Federation of Trade Unions (Saftu).
“News that South Africa’s economy is getting smaller, not bigger, is a most urgent reminder that the government’s current approach of ‘reform incrementalism’ just won’t cut it. We need much faster and bolder economic reform to turn South Africa’s economy around,” said DA leader Geordin Hill-Lewis.
“South Africa cannot afford another year of half-measures, endless consultations and reforms moving at a bureaucratic crawl.”
Hill-Lewis said he had written to Ramaphosa and asked him to “confront” those in the government who were blocking reform.
Saftu offered the opposite view.
The federation, speaking through its general secretary, Zwelinzima Vavi, described the GDP figures as “a red alert of an economic catastrophe unfolding before our eyes”.
“These are not abstract numbers,” Saftu noted. “They are an advance warning of factory closures, retrenchments, hiring freezes and further destruction of livelihoods that will increasingly be reflected in employment figures in the coming quarters and throughout the remainder of the year,” Vavi said earlier this week.
He rejected the notion that the war in Iran was responsible for the country’s economic woes, arguing that, as with the Covid crisis six years ago, the economy had entered the crisis already in a parlous state.
“The international shock is real. But it did not create South Africa’s economic crisis. It exposed and aggravated structural weaknesses that have accumulated over decades,” Vavi said.
“South Africa entered this crisis with catastrophic unemployment, declining industrial capacity, weak domestic demand, declining public investment, an investment strike by private capital and an economy structurally incapable of meeting the basic needs of its own people. The latest figures expose the scale of the danger.”
While Ramaphosa can point to the R890 billion pledged at the South African Investment Conference and argue that there is no investment strike, he cannot counter Saftu’s broader argument about declining industrial capacity or an economy structurally incapable of meeting the basic needs of most citizens.
Nor can Ramaphosa point to the credit-rating upgrades as sufficient evidence that the reforms are working.
Credit-rating upgrades are merely the first in a series of steps that could ultimately lead to economic growth and job creation by lowering the cost of borrowing. They are not in themselves a solution or the ultimate goal. Ratings agencies reward a country’s ability to service its debt and repay it when it falls due, even if that capacity is achieved by cutting social spending or reducing investment in infrastructure.
The ultimate measure of the reforms’ success should be economic growth and job creation. Thus far, Operation Vulindlela has helped revive Eskom and Transnet, streamlined the visa regime and is now trying to fix municipalities.
But it has not yet delivered growth or jobs.
Nedbank expects GDP to return to positive growth in the second half of the year, with annual growth now forecast at 1,2%.
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