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Stagnation, stagflation or is our economy in its "sweet spot"
Date: 4 October 2018 Category: Economics |
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We take a look at whether South Africa's economy is in its economic sweet spot, or whether we are experiencing stagnation or even worse, stagflation.
There is a lot of commentary on South Africa's economy doing the rounds, we are currently in a recession, defined as two consecutive quarters of negative economic growth, inflation is increasing due to rising petrol prices (thanks to higher oil prices and a weak exchange rate). The weak exchange rate brought about by a strong US dollar and political and policy uncertainty in South Africa (think expropriation without compensation). So how is all this affecting South Africa's economic performance. We take a look below. |
President Cyril Ramaphosa will need to show strong political will and leadership if he is to drag South Africa out of its economic mess
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Stagnation, stagflation or economic sweet spot?
The graphic below has a X-axis (which shows the rate of inflation in South Africa) and a Y-axis, which shows the economic growth rate of South Africa. There are 3 coloured blocks in the graphic. We discuss them below:
- Green Block: This is what we see as South Africa's economic sweet spot. This is when South Africa's economic growth is between 5% and 7% (government target is 6%), while inflation is between 3% and 6% (the South African Reserve Bank inflation target). So should our economy grow between 5% and 7% and inflation be between 3% and 6% we will fall within the green block, or otherwise stated we would be in our economic sweet spot. This is where we want to be all the time.
- Red block: This is what we call stagnation. Basically no real price growth/inflation and no real economic growth to speak of either.
- Gray block: This is what we call "stagflation". Stagflation refers to cases where prices are high or in the increase, this inflation is high or increasing, yet economic growth is not really taking place. This is a very dangerous place to be in as the economy is not growing, but price increases is eroding the value of money of South African citizens.
The big yellow circle called Pie in the Sky shows a economic growth rate of 10%. This is where South Africa would desperately want to be at but will probably not be able to achieve for many many years to come, if in our life time at all. This is close to where many other countries across the world is aiming towards, or has achieved in recent years.
As one can see the yellow dots are fairly closely clustered around one another and are pretty close to the gray block which indicates stagflation. Which is low to no economic growth with high levels of inflation. And with recent fuel price increases hitting new record highs (see latest fuel price increase article), it will be not be surprising at all if South Africa's economy falls well and truly into the Gray block during the 3rd and 4th quarter of 2018. Significant political and policy changes are required if South Africa is to drag itself out of the Gray block showing stagflation into the green block which represents our economic sweet spot. While it is not impossible, it does require the political will, of which there seems to be very little of in South Africa to change South Africa's economic trajectory and put us on a path of greater sustainable economic growth. A few changes that could speed things up include:
While there are many other things government could address to improve South Africa's economic fortunes, it seems the ruling party and government is to busy fighting with itself and within itself to address the economic issues facing millions of South Africans.
As one can see the yellow dots are fairly closely clustered around one another and are pretty close to the gray block which indicates stagflation. Which is low to no economic growth with high levels of inflation. And with recent fuel price increases hitting new record highs (see latest fuel price increase article), it will be not be surprising at all if South Africa's economy falls well and truly into the Gray block during the 3rd and 4th quarter of 2018. Significant political and policy changes are required if South Africa is to drag itself out of the Gray block showing stagflation into the green block which represents our economic sweet spot. While it is not impossible, it does require the political will, of which there seems to be very little of in South Africa to change South Africa's economic trajectory and put us on a path of greater sustainable economic growth. A few changes that could speed things up include:
- Clarity regarding the whole expropriation of land without compensation. If property rights cannot be protected and guaranteed in South Africa why would anyone, be it local or foreign invest here?
- Corporate taxes needs to be cut to become more competitive with the rest of the world.
- Collected taxes should be spent by government more effectively and efficiently to provide proper services to the people and to create an environment people and businesses would want to invest in
- Labour laws and the impact of labour unions needs to be tackled. But this will be hard as the ruling party has a massive support base belonging to labour unions. Making it hard to hire and fire people in South Africa is certainly a deterrent for businesses looking to enter the SA market
While there are many other things government could address to improve South Africa's economic fortunes, it seems the ruling party and government is to busy fighting with itself and within itself to address the economic issues facing millions of South Africans.