|
Blog : 25 October 2016 (Stagnation, Stagflation or Economic Sweet spot)
|
Related Topics |
|
We take a look at where South Africa's economic performance lies. Is it experiencing, Stagnation, Stagflation, Defcession (Deflation and economic recession) or Defnation (Deflation and economic stagnation).
|
Picture speaks a thousand words
Below South Africa's economic performance in terms of economic growth (or GDP growth on the Y-axis) and South Africa's inflation rate on the X-axis.
So the different coloured blocks in the XY chart represents different economic scenarios as defined by us. They are as follows:
Green Block: Economic Sweet Spot (This is where government's economic growth target of 6% a year is met while our inflation rate remains between 3% and 6% target as set out by the South African Reserve Bank)
Light Blue Block: Stagflation (High levels of inflation with low levels of economic growth)
Light Red Block: Stagnation (Low levels of economic growth, but not necessarily coupled with high levels of inflation)
Light Gray Block: Defnation (This is where a economy experiences low/no growth and deflation (prices are going down). Most famous country that experienced a lot of this in the past is Japan.
Dark Gray Block: Defcession (This is where a economy experiences a recession and deflation. To be avoided at all costs). As this will be a very hard hole from which to dig itself out off.
Green Block: Economic Sweet Spot (This is where government's economic growth target of 6% a year is met while our inflation rate remains between 3% and 6% target as set out by the South African Reserve Bank)
Light Blue Block: Stagflation (High levels of inflation with low levels of economic growth)
Light Red Block: Stagnation (Low levels of economic growth, but not necessarily coupled with high levels of inflation)
Light Gray Block: Defnation (This is where a economy experiences low/no growth and deflation (prices are going down). Most famous country that experienced a lot of this in the past is Japan.
Dark Gray Block: Defcession (This is where a economy experiences a recession and deflation. To be avoided at all costs). As this will be a very hard hole from which to dig itself out off.
So what is this graphic saying about South Africa. Well as can be seen from the purple scatters (that represents South Africa's economic growth rate and inflation rate per year), while our inflation has been kept largely in check (between 3% and 6% on the X-axis), South Africa's economy has not been growing near fast enough to reach the economic sweetspot as represented by the green block. While the South African Reserve Bank has been able to meet its target of keeping inflation in check over the years (monetary policy), government (fiscal policy) has not been able to stimulate growth to get South Africa growing at the 6% target as set by government.
This is due in a large part because of the fact that in order for the Reserve Bank to meet their target of 3% to 6% inflation, they stunt economic growth by raising interest rates to curb inflation. Higher interest rates leads to lower demand as less money is available to spend by consumers as more money is used to service debt. In essence it does seem that South Africa's monetary and fiscal policy mix is hardly ever co-ordinated. And until it is we will always struggle to move away from our "stagflation" status into the economic sweet spot we require to reduce unemployment and create jobs in South Africa. See our Monetary Fiscal Policy Mix write up here.
One has to feel for Minister Gordhan as he prepares his mid-term budget. The economy is not growing fast enough to create jobs, which in turn will lead to a bigger tax net and higher government revenues collected. Spending is being depressed by higher interest rates which means less VAT will be collected on goods bought by consumers. In addition to this the parastals seems hell bent on continuing to waste government money. And unions continue to demand above inflation increases not only in private sector but also in the public service. Making it hard for Treasury to cut the government spending bill as the wage bill keeps ballooning. South Africa seems set to continue on its stagnating path for years to come.
Only way out for Minister Gordhan is to tax the rich more, and as we showed in the past, the poor rich people are already being milked so much, that eventually there will be nothing left to milk (read article here). A fine line needs to be walked by minister Gordhan. But hey if he can outmanouver the "Zupta's" a mid term budget speech should be a breeze for him.
This is due in a large part because of the fact that in order for the Reserve Bank to meet their target of 3% to 6% inflation, they stunt economic growth by raising interest rates to curb inflation. Higher interest rates leads to lower demand as less money is available to spend by consumers as more money is used to service debt. In essence it does seem that South Africa's monetary and fiscal policy mix is hardly ever co-ordinated. And until it is we will always struggle to move away from our "stagflation" status into the economic sweet spot we require to reduce unemployment and create jobs in South Africa. See our Monetary Fiscal Policy Mix write up here.
One has to feel for Minister Gordhan as he prepares his mid-term budget. The economy is not growing fast enough to create jobs, which in turn will lead to a bigger tax net and higher government revenues collected. Spending is being depressed by higher interest rates which means less VAT will be collected on goods bought by consumers. In addition to this the parastals seems hell bent on continuing to waste government money. And unions continue to demand above inflation increases not only in private sector but also in the public service. Making it hard for Treasury to cut the government spending bill as the wage bill keeps ballooning. South Africa seems set to continue on its stagnating path for years to come.
Only way out for Minister Gordhan is to tax the rich more, and as we showed in the past, the poor rich people are already being milked so much, that eventually there will be nothing left to milk (read article here). A fine line needs to be walked by minister Gordhan. But hey if he can outmanouver the "Zupta's" a mid term budget speech should be a breeze for him.