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We take a look at the state of South Africa's economy. How well is it performing? What is driving it's performance and what is holding it back from achieving greater growth rates and leading to greater overall wealth for South African citizens? There are so many figures quoted with regards to the economy, and a lot of them send mix messages with regards to the state of South Africa's economy. We cut through the noise and dig down to the core of South Africas economy. And sadly it seems that South Africa's economy is just drifting along as there are no real positive continious trends that gives one hope of a strong economic recovery that would be able to create jobs for the masses of unemployed.
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The facts about South Africa's economy
Economic Growth (GDP)
South Africa's economic growth rate is the most widely quoted economic indicator. And in recent years it's average growth rate per year has been steadily declining. Below we take a look at the average growth rate per year (based on the quarter on quarter annualised growth rates). And from the bar chart it is clear that South Africa's economic growth rate has been losing steam slowly but surely.
Sadly South Africa's economic performance is directly linked to the performance of commodities. And this is a structural problem South Africa's government needs to address. In order to protect South Africas economy from cyclical movements such as commodity price movements, greater emphasis should be placed on developing other sectors of the economy, in which demand does not fluctuate as much. This would go a long way in smoothing out South Africas economic cycles.
Employment
The graphic below takes a look at South Africa's formal sector employment levels per year from 2009 to current levels in 2016. It excludes informal and agricultural employment and provides insights into the employment levels of the formal corporate employment levels in South Africa. While formal sector employment has grown by 11.8% from 2010 to 2016, the population of South Africa has grown by a smilar margin (see below). Basically saying that South Africa is not creating enough new jobs to reduce its stubbornly high levels of unemployment.
When looking at gross earnings earned by the formal sector, it has grown by 55%, but inflation over the same period showed about 44% growth, eating away most of the growth in gross earnings, leaving only about 11% increase in real earnings (earnings after the effects of inflation is removed) over a period of 6 years. Thats roughly a 2% increase in real earnings growth per year over the last 6 years.
Population Growth
One might wonder why this variable is added here. Well its added here to illustrate how quickly South Africa's population is growing, and if the economy or employment does not grow at the same or faster rate, the average slice of the economic pie per South African decreases. As the population grows, so should the economy and employment. If it doesn't the country's wealth per citizen is declining, and this can never be a sustainable trend.
From the bar chart above it is clear that South Africa's population is growing pretty steadily. Now if one plots the economic growth rate per year as per the first graphic, on the same graph as the growth rate in the population, it becomes clear that South Africa's economy is not keeping up with the growth rate in the population (well it least not in 2014 and 2015), in essence implying the average South African has been getting poorer over the last two years as more and more people are sharing a slice of a pie (the economy) that is not increasing at the same pace as the population. This is a unsustainable trend could lead to very serious consequences such as uprisings, revolts, strikes and protests, violence and absoulte anarchy if this trend is not reversed.
Below South Africa's GDP growth per year is compared to South Africas population growth rate per year (from 2010 to end 2015).
South Africa's economic growth rate has to keep up or outpace population growth in order for the overall welfare of South Africans to improve. While over the last 6 years (2010 to 2015), GDP growth rate (13.4%) has outpaced population growth (11%), the last two year's has seen a reversal of this trend, if this reversal is sustained into the foresable future it could lead to massive disruptions and protests by the poorest of the poor in South Africa.
Manufacturing
We take a look at South Africa's manufacturing production capacity. As this provides an indication of demand and overall capacity used. If plants are running near full capacity it shows there is strong demand for locally produced goods, if overall capacity utilised is dropping off it shows lackluster demand or excess capacity available (to many plants built during boom times).
The bar chart above shows South Africa's average manufacturing under utilisation per year from 2005 to the last available data point for 2016. From 2010 to 2016, the average under utilisation is sitting at 19%. This implies that factories in South Africa has been running at about 81% of full capacity.
With the lowest level of under utilisation seen in 2007 when under utilisation was sitting at 14.2%. Since then the picture has gotten progressively worse, and by end of 2015, average under utilisation for the year was sitting at 19.3%. The South African economy and its manufacturing sector has still not recovered from pre financial crisis days. As one can see from the bar chart there is a clear structural change in our manufacturing under utilisation from 2008 (when the financial crisis hit the global economy).
With the lowest level of under utilisation seen in 2007 when under utilisation was sitting at 14.2%. Since then the picture has gotten progressively worse, and by end of 2015, average under utilisation for the year was sitting at 19.3%. The South African economy and its manufacturing sector has still not recovered from pre financial crisis days. As one can see from the bar chart there is a clear structural change in our manufacturing under utilisation from 2008 (when the financial crisis hit the global economy).
Real Interest Rates
One of the main problems for South Africa is its savings rate. And the the fact that inflation is eating away at investors returns, particularly those investing in money market or interest earning instruments. Earning a 6% per annum interest rate, when inflation is at 6.3% basically means investors are losing 0.3% in purchasing power, as prices are rising faster than your returns you are earning on your savings. So the question people would ask is why save when it makes me worse off? The graphic below takes a look at South Africa's real interest rates.
Exchange Rate
Perhaps one of the most telling variables of economic performance is the exchange rate. It provides an instant market snapshot or view on a country's economy and moves almost instantly to any news on a country's economy (inflation, real interest rates, economic growth, employment numbers, manufacturing - all variables we looked at above), politics, policies.
A strong currency is usually a sign of foreign investor confidence in a country and its economy, a weak or depreciating currency (if not tampered with by goverments to keep it devalued) is a sign that investor confidence is dwindling and foreign investors are offloading the local currency and moving money elsewhere.
This is a very simplistic view on what drives currencies (as there are a wide variety of factors that can influence currency movements), but our view remains currency performance is directly linked to economic performance and the confidence foreign investors has in a country and its economy.
A strong currency is usually a sign of foreign investor confidence in a country and its economy, a weak or depreciating currency (if not tampered with by goverments to keep it devalued) is a sign that investor confidence is dwindling and foreign investors are offloading the local currency and moving money elsewhere.
This is a very simplistic view on what drives currencies (as there are a wide variety of factors that can influence currency movements), but our view remains currency performance is directly linked to economic performance and the confidence foreign investors has in a country and its economy.
From the line graph it is pretty clear that the Rand has been taking a pounding for years, and the biggest blow to the currency in ages came when President Jacob Zuma decided in December 2015, to appoint an absolute nobody as finance minister (possibly to try and push through a nuclear power finance approval or to grant more money to SAA so that their Chairman can pay unknown boutique finance houses massive amounts to do absolutely nothing), intead of keeping well respected Mr Nene in the job.
Markets reacted violently, and President Zuma had no choice but to let now infamous weekend special Van Rooyen go and bring back Pravin Gordhan as finance minister. The President claimed Mr Nene was earmarked for a BRICS bank job. Wonder how that is panning out?
As we mentioned earlier, the currency shows confidence in a country and its economy, and based on the performance of the ZAR in recent years, there is little confidence in South Africa or its economy currently.
Markets reacted violently, and President Zuma had no choice but to let now infamous weekend special Van Rooyen go and bring back Pravin Gordhan as finance minister. The President claimed Mr Nene was earmarked for a BRICS bank job. Wonder how that is panning out?
As we mentioned earlier, the currency shows confidence in a country and its economy, and based on the performance of the ZAR in recent years, there is little confidence in South Africa or its economy currently.