After the Bell: SA’s economy is weird — or is it?
An economy is constituted by thousands of variables that move in ways that are difficult to foresee. It’s said that astrology was invented so economics would seem like an accurate science. Economic forecasters assume everything, the old joke goes, except responsibility.
Here is an old economics question: Assume the main cost of raising pigs is corn, which happens to be generally true. Let’s say the price of corn goes down. Does the cost of pork decline, rise, or stay the same? The answer is the least obvious: the price of pork rises or, at least in most circumstances, it will most probably rise in the short term.
Why? Because farmers will take advantage of the lower costs. Hence, they will hold on to their existing stock for as long as possible to maximise the gain. That will create a shortage of pork, which will increase the price.
This is all theoretical of course; in time, the price of pork will go down as the market evens itself out. But how much time? It’s complicated by the extent of the decline in the price of pork, and how long farmers can hold on to their stock, selling heavier but cheaper pigs. And this is just one variable.
An economy is constituted by thousands of such variables that move in ways that are difficult to foresee. That is why it’s said that astrology was invented so economics would seem like an accurate science. Economic forecasters assume everything, the old joke goes, except responsibility.
SA has just had one of these moments, but for a change, I think there is an explanation. What happened last week is that there were three major economic data releases: second-quarter GDP, third-quarter business confidence and fixed investment increases.
GDP surprised, yet again, on the upside. This in itself is a bit of a shock. Think of all the things that are happening which should be holding GDP growth back — the most obvious is load shedding, but there are also the ongoing issues of higher interest rates, logistics constraints and declining commodity prices.
It’s not just that load shedding continued, it’s that the level of load shedding was worse than it was last year over the same period (when GDP contracted by 0.9%). Furthermore, the RMB/BER Business Confidence Index (BCI) rose very marginally, suggesting SA might have been in for yet another GDP shocker on the downside. But in fact, GDP growth last week came in at 0.6%, which doesn’t sound like much — in fact, it isn’t much — but at least it’s positive. It was also twice the average views of SA’s economists.
But there is more that’s confusing. While business confidence is more or less static, investment is increasing. How do you interpret that?
Well, I think RMB’s chief economist, Isaah Mhlanga, puts it very well in a note to clients. What’s pushing up the investment numbers is the machinery and equipment category, where investments in renewable energy, like solar panels, electrical equipment and inverters, are captured. There is some tech purchasing that’s rising for different reasons.
Consequently, the investment that is taking place is happening not despite low confidence but because of it; this is investment to improve business resilience. That’s not a consequence of high confidence, but a functional necessity. Outside of these sectors, investment growth has been poor and resembles what is expected in times of low business confidence, Mhlanga notes.
So what are the consequences? The first, he points out, is that load shedding may progressively have a diminishing effect on GDP. The electricity availability rate has declined every year and is the lowest it’s been for the past four years at least. But the private sector has added 4.4GW of solar power over the past year and a bit, which we see in the investment figures. That is just less than what the Medupi Power Station should be able to produce but doesn’t (it’s worth noting that Medupi took 13 years and cost R234-billion to build, and will cost billions more to run).
So, maybe SA’s seemingly contradictory economic figures are easier to understand than they seem. But please, don’t hold me to that view. DM