As SA tries to engineer an economic revival, improving the country’s growth rate is becoming increasingly critical, and hinges on revitalising key components of the economy. We have compiled a list of 12 key indicators we are paying close attention to, scoring them on a monthly basis to assess if SA is making meaningful progress towards an economic turnaround.
The ranking began in January following the election of Cyril Ramaphosa as ANC and South African president, and the ensuing Ramaphoria. The 12 indicators chosen focus on a wide range of variables including political stability, policy clarity, business confidence, employment, capital expenditure, housing activity and consumer income.
Taking into account the impact of the various key economic developments over the past month, SA’s economic turnaround score was a disappointing 41% in July 2018. This compares with a score of 42% in June, 44% in May, 46% in April, 43% in March, 40% in February and 33% in January.
The score of 41% is consistent with the expectation of very modest economic growth in 2018, and is disappointing relative to earlier expectations that the score would move steadily higher each month, rising convincingly to above 50% towards the end of 2018.
Hopefully the current lack of economic progress will encourage the government to focus on better understanding what is required in order for the economy to achieve meaningfully higher economic growth and employment.
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.
Fixed investment activity
Institutional strength/SOE reform
Purchasing Manager's Index (PMI)
Interest rate spread
Leading economics indicator
(business and consumer)
Are we on the right track?
Lifting South Africa’s growth rate to above 3% on a sustained basis will require significantly more effort than is currently evident, including the co-ordination of policy efforts across key government departments. There is a risk that the consumer confidence index showed excessive optimism during Q1 2018.
In our view these challenges can be broken down into five main categories:
- Uplifting business confidence to stimulate private sector fixed investment
- Restoring fiscal discipline and avoiding further credit rating downgrades
- Reforming SOEs
- Ensuring clear and consistent transformation policies
- Reducing the extent of corruption in both the private and public sectors
Despite initial optimism that the political changes, which occurred in December 2017, would quickly lead to signs of an economic revival, South Africa’s economic performance has been disappointing in the first half of 2018 and the country risks slipping into recession.
Unfortunately, although some of South Africa’s high-frequency economic data improved slightly in May 2018, this has not been sustained. Recently, the South African Reserve Bank opted to revise down their 2018 GDP forecast, from 1.7% to a mere 1.2%, while a number of private sector analysts are also revising their growth estimates lower to around 1%.
More positively, SA interest rates are still expected to remain unchanged over the short to medium term, the rand has been relatively range-bound in recent months, especially when measured on a trade-weighted basis, while consumer confidence remains well above the long-term average.
It is also encouraging that the President has managed to secure pledges of more than $35 billion in foreign direct investment from China, UAE and Saudi Arabia. Hopefully, this will be supported by the announcement of additional local investment at the October 2018 Investment Summit.
It has become increasingly apparent that key components of the South African economy, especially household spending, will struggle to gain significant momentum unless there is a sustained increase in investment and employment.
Unfortunately, uncertainty regarding a number of key policy issues continue to weigh negatively on investor and business sentiment including the increased likelihood that land redistribution without compensation will be more vigorously persuaded by the government, the lack of clarity regarding key aspects of the proposed mining charter, and the impact of government’s initiative to introduce a new system of National Health Insurance including how this initiative will be funded.
These is clearly a risk that economic policy retains a populist bias as the country moves closer to the National Election around the middle of 2019, and at the same time key SOEs could require additional financial support in order to avoid outright bankruptcy.