The pace at which economies grow over the long term is determined mainly by structural factors. When policies encourage high rates of investment, job creation and the more efficient use of capital and labour, economies grow rapidly. Economies that fail to achieve these outcomes grow slowly.
No matter how slow or rapid the pace of longer-term growth, no economy grows at a constant rate. Fluctuations in growth are an inevitable part of the business cycle.
Cyclical downturns may have domestic causes. For example, an increase in interest rates to reduce excessive credit growth will slow consumer and investment spending. Downturns can also have external causes, such as a global slowdown and a weaker contribution from exports.
Economic policies designed to raise long-term growth performance must aim at improving structural contributors to growth over time. Short-term policies to reduce the volatility of growth try to reduce the pain of downturns and dampen the excesses of unsustainable booms. Importantly, such policies to address short-term weakness should not do so at the cost of long-term growth.
The often politically charged process of economic policy formulation in SA is hoping to raise the long-term rate of growth. Current growth of 3,3% per annum achieved since 1994 is not sufficient to reduce our very high levels of unemployment, poverty and inequality, so the government has set a target of 7% annual growth.
Despite this focus on long-term growth objectives, it is clear that growth in the economy is slowing. Gross domestic product (GDP) growth slowed from 3,1% last year to 2,7% in the first quarter of this year. More recent indicators suggest it could slow even further. We need to reverse this.
The slowdown is occurring against the backdrop of deepening recession in the European Union (EU), feeble growth in the US and slower growth in China. It is tempting to blame our woes on external forces. However, SA's economic growth is poor when compared with other emerging markets, including the rest of Africa. Clearly, some of the causes of our weakness are internal.
Growth in consumer spending slowed in real terms from 5% in 2011 to 3,1% in the first quarter of 2012. This is because households are trying to reduce their debt from the record 82% of after-tax income reached in 2008 (up from 53% in 2002). There may be scope to cut interest rates further if inflation continues its downward trajectory. Together with further falls in the petrol price, this would encourage slightly stronger consumer spending. But consumer spending will not rise rapidly until job creation improves. Countries cannot spend their way to prosperity.
The budget deficit is already high and so there is little scope to stimulate the economy via higher government spending or tax cuts. Government debt is rising rapidly and the government is committed to reducing the deficit, but only gradually, so as not to worsen current economic weakness.
Better policy formulation could achieve substantial short-as well as long-term benefits in two areas: falling mining production and weak private sector investment. Urgent steps are needed to boost these important determinants of our performance.
Exports fell in absolute terms in the first quarter of 2012. While some of this fall was caused by the weakness in our largest trading partner, the EU, the most important contributing factor was falling mining production, almost 15% since 2005. This decline is largely of our own making. Strikes, safety-induced mine closures, regulatory inefficiencies and continued talk of nationalisation are having a negative effect on mining output. This must be addressed urgently.
Weak exports meant that SA experienced a current account deficit of 4,9% of GDP in the first quarter. Given the current weakness of economic growth, this is astonishingly high. Improved export performance is a necessary ingredient of any short-term recovery as well as sustained higher long-term growth, or the current account deficit will quickly reach unsustainable levels when imports inevitably rise.
The strongest contributor to growth in the first quarter was fixed investment, which grew 5,3%. This was underpinned by strong public sector investment growth, mainly by the parastatals, of 11,7%. However, growth in private fixed investment was just 1,8%.
While public sector investment will remain high for several years as a result of the government's belated focus on infrastructure spending, its rate of growth is likely to slow. Investment growth over the longer term can only be sustained if private investment also grows rapidly. Current government rhetoric is often hostile to private and especially foreign investment and is worsening investment uncertainty. This is contributing to SA's currently fragile growth prospects.
We need decisive policy action and leadership moving beyond populist slogans that sacrifice economic performance for political advantage. Failure to do so will cause unnecessary economic pain. SA as a whole will pay the price for politicians' cheap rhetoric, in lost opportunities for long-term growth, jobs and rising living standards.
- Gavin Keeton is with the economics department at Rhodes University. This article was published on Business Day.