South Africa

Merrill Lynch on SA’s economic future in 2014: In good shape, except where it isn’t

By J Brooks Spector 17 January 2014

On Thursday, in a briefing in Johannesburg, Merrill Lynch’s chief economist offered his annual assessment of the South African economy for the coming year – a kind of rosy scenario with all the possible downside footnotes inserted as needed. At this briefing, J. BROOKS SPECTOR heard an interestingly sanguine view, except for some worrisome things left unsaid.

Similarly to various other organisations and experts in the country, Matthew Sharratt, chief economist of Merrill Lynch (now a subsidiary of the Bank of America following its near-demise as an international brokerage firm in the world’s 2008 financial meltdown) provided his views this week about South Africa’s economic prospects for the coming year. And as intriguing as it was for the sophisticated, detailed analysis he brought to bear on this topic – the things left out gave it something of the texture of an investment banker’s version of “The Hound of the Baskervilles”. Readers may recall that the hound terrorising the area did noy bark proved to be the key to Sherlock Holmes’ solution of that puzzling case. Similarly, some of the facts left out in Merrill Lynch’s projections of the likely developments of 2014 may, in the long-term, may prove to be the larger keys to South Africa’s economic future.

In the coming year, Sharratt said his analysis pointed to a 2.9% rate of economic growth, up from a projection of 2% in the year just ended, and an anticipated growth figure of 3.5% in the year afterwards. This growth figure would come from an anticipated rise in exports as the European, American and Chinese economies draw increasingly on commodities from South Africa, even as relatively weak local economic circumstances would continue to put a damper on local consumption levels, thereby helping keep a downward pressure on imports.

Key challenges for the current year remain the threat of rising inflation (on the back of the weak rand), the potential for damaging strikes, especially in the mining sector, a weak rate of private sector investment (including continuing weak flows of foreign direct investment beyond portfolio investments), and that continuing, weak domestic demand. Nonetheless, in the event of a seriously crippling strike that halted the production of minerals for export, economic growth could still be negatively affected early in 2014. Sharratt did not think there would be sustained strike actions at that level, however. Another factor, of course, was the fact that the gradual tapering off of the US Federal Reserve Bank’s quantitative easing could make it harder for the South African economy to sustain its efforts to expand its economy. One other risk out there is the potential for negative sentiment on the rand by virtue of South Africa being grouped in the so-called new “fragile five” economies – Brazil, Indonesia, Thailand, Turkey and India.

Nevertheless, Sharratt argued that the increase of exports because of the gradual reenergising of western economies would be good news for the nation’s trade balance (now in deficit of course) as well as its current accounts deficit. His analysis pointed to a decline in the current accounts deficit from 6.8% to 4.6% of GDP by mid-year.

Looking at the country’s domestic economy, Sharratt did note that worrisome trends included higher food prices and the knock-on impact of the weak rand on consumption – with the consequent inflation figures moving from 5.8% for this year to 6.1% by next year. That, in turn, would point to a Reserve Bank rate hike by early 2015. In fact, Sharratt noted that his analysis points to a South African economy entering a very fragile recovery that barely looked like a sustained, vigorous recovery at all – and one that is likely to be insufficient to support some of the government’s larger objectives.

Afterwards, discussing the implications of his formal briefing, Sharratt noted that the projected growth rate of 2.9% would only generate about 270,000 to 280,000 new jobs a year – far fewer than needed to improve the social circumstances of the country. South Africa continues to add at least three times as many as that number to the yearly total of new labour pool entrants. This includes a yearly total of around 700,000 individuals who drop out of school before the matric examination process; the new high school graduates with no university exemption and who have only slightly better prospects that school dropouts; and new university graduates who presumably have the best chances of finding full time work.

At an economic growth trajectory of under 3%, for years to come, this will work out to only a bit more than a million or so actual new jobs over half a decade – but only if the country can at least continue that level of economic growth amidst the international economic circumstances. And this, of course, is millions of jobs fewer than the seductive promises of the current government.

Of course it is possible the country’s economy will be ratcheted upwards into much stronger rates of growth, but that will only happen if the economy expands significantly in new growth industries or effectively revived older ones, or if it becomes significantly more efficient than it is now. But here’s the thing about this – greater efficiency means making labour more productive or squeezing low-level, relatively unskilled labour out of the productive process through greater mechanisation or improved production processes.

The former would require a more technologically proficient, better-educated work force than is being trained today. The latter would result in pushing the least educated, least productive out of the work force, to be replaced by labour-saving technologies – thereby compounding the problem of persistent, structural unemployment. By contrast, economists have generally agreed a sustained growth rate of at least 5% per year for South Africa, for a decade, will be needed to make a real dent in the level of unemployment and thereby bringing unemployment down to the government’s expressed goal of around 10%.

While government officials are bravely calling for just this rate of growth and pointing to the implementation of the National Development Plan as a pathway to get there, at this point, much of that growth would actually rest on the cash injections coming from the major infrastructure spending plans of the government, going forward into the future. But in the real world, the government will be bumping into real spending limits. If this drives up the government deficit significantly more than at present it makes the government issue debt with higher and higher premiums thereby making the cost of this debt unsustainable. And there are very real restrictions on current skills availabilities to carry out those big plans. And this, of course, is because of an educational sector that continues to be unable to provide the mathematically and technologically adept graduates in sufficient numbers to meet the nation’s needs.

Thus the longer-term political implications of all of this remain to be factored in as well.  If unemployment continues to hover at a quarter of the work force for an entire decade in the face of government promises to do something, what are the demands the disaffected will begin to put on the political system? How patient will such a large, near-permanent class of unemployed, unemployable, and increasingly unhappy people continue to be thirty years into South Africa’s post-apartheid society? What kinds of demands will they place on an already overburdened social infrastructure and how will they make these demands felt? Economists are generally silent on this question but historians and sociologists may not be. The great 19th century French observer of the successes of democracy and the discontents of authoritarianism, Alexis de Tocqueville, had written of Czarist Russia in the 1840s, “The most dangerous moment for a bad government is when it begins to reform.” Switch the word “ineffectual” for “bad” and maybe one will grasp the socio-economic challenges lying in wait for tomorrow’s South Africa. DM

Photo: A shopper pushes a trolley as logos of shops are seen on a wall at a shopping centre in Lenasia, south of Johannesburg, August 28, 2013.  REUTERS/Siphiwe Sibeko


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