As South Africa tries to engineer an economic revival, improving its growth rate hinges on revitalising key components of the economy. We have compiled a list of 12 key indicators that we monitor closely and have scored on a monthly basis since the beginning of 2018, to consistently and systematically assess if the country is making meaningful progress.
These 12 key indicators focus on a wide range of variables including political stability, policy clarity, business confidence, employment, capital expenditure, housing activity and consumer income.
June 2019 analysis
Taking into account recent political developments, including the composition of various key portfolio committees in parliament, the lack of a decisive policy response to the latest slump in economic activity, and ongoing uncertainty about how the financial and operational difficulties in Eskom and other key SOEs will be resolved has meant that the average score of the twelve indicators has fallen back to below 50% at the end of June (48% - 4.8 out of 10), after rising to 51% in May 2019.
The focus will now shift to the Investment Summit in October 2019, the Medium Term Budget Policy Statement, also in October 2019, and the credit rating review by Moody’s before the end of 2019.
How we score:
Every month, each indicator is scored on a scale of 1 to 10, with 10 indicating an extremely high level of vibrancy and 1 suggesting extreme underperformance. The scores are then averaged across all 12 variables to derive the overall progress level (reflected as a percentage), which we will analyse and share with you here.
Leading economic indicator
Fixed investment activity
Purchasing Manager's Index (PMI)
Institutional strength/ SOE reform
Confidence (business and consumer)
Interest rate spread
Are we on the right track?
The sharp fall-off in economic activity has not elicited a policy response. The first quarter 2019 decline in South Africa’s GDP performance was shocking. This was partly because the magnitude of the decline was far worse than people anticipated (-3.2%q/q in Q1 2019 was the worse fall-off in economic activity in ten years), partly because almost every sector of the economy contracted, (including manufacturing and retail trade), and partly because the policy officials still appear relatively unconcerned by lack of economic growth and rising unemployment.
Given the weaker than expected start to 2019, we have revised our GDP growth estimate for 2019 down to only 0.7%, but are highlighting that the risk is still to the downside. In fact, the GDP forecast of 0.7% for 2019 as a whole assumes that there is a meaningful improvement in SA GDP growth in the second half of 2019, which is clearly far from assured.
It seems clear that renewed electricity outages at the start of 2019, coupled with the intense focus on South African politics ahead of the 8 May 2019 National Election, meant that many government departments, households and businesses adopted a “wait-and-see” approach.
Consequently, there is now enormous pressure on the newly elected administration, represented by the 28 cabinet ministers, to urgently focus on lifting business confidence, investment and employment.
Under these circumstances the unemployment rate will continue to rise and tax revenue will substantially undershoot the government’s February 2019 budget projections. This, together with the additional funding required by Eskom and other major SOEs, suggests that South Africa’s investment grade credit rating by Moody’s is at risk of being revised lower.
Eskom and other major SOEs remain a major concern. In the June 2019 State of the Nation address, the President highlighted that Eskom will receive additional funding in 2019. More specifically, government will urgently table a Special Appropriation Bill in order to allocate a larger portion of the R230 billion fiscal support that Eskom was allocated over the next ten years within a shorter time frame. The details surrounding how this additional financial support will be funded and allocated has, very unfortunately, not been revealed. Government still aims to appoint a Chief Restructuring Officer for Eskom, although the President provided no further detail on the unbundling of Eskom.
The President also confirmed the independence of the Reserve Bank, highlighting that the Reserve Bank must pursue its constitutional mandate independently, without fear, favour or prejudice. Lastly, the policy to expropriate land without compensation was mentioned by the President, but not further clarified.
Overall, the June 2019 SONA was disappointing. The President was unable to show any meaningful progress in any key area of economic activity since the February 2019 SONA. Furthermore the priorities/goals remain overly ambitious for a country that at the end of 2018 recorded its lowest level of domestic savings ever. In that regard the speech can be criticised for simply announcing another list of ambitious tasks and initiatives without fully understanding or explaining why all the previous plans have not been fulfilled.
That is not to say that the priorities/goals are not crucial – they are – but at this stage the focus should be more fully on implementation in a post-election environment.
To track our progress since the beginning of last year, visit our Knowledge Centre on https://knowledgecentre.stanlib.com/measuring-south-africas-economic-turnaround-july-2018/