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South Africa a dark spot in optimistic world growth picture

IMF downgrades SA growth forecast, Gordhan discusses outlook with economists.

Yesterday, the International Monetary Fund (IMF) released an update to its World Economic Outlook (WEO), which was last published in October last year. The update was surprisingly sunny – the IMF revised its growth forecasts for 2014 upward, projecting global growth of 3.7% for this year, 0.1% higher than its previous forecast.

As you can see in the table below, a number of individual countries’ growth projections for 2014 were revised upward, including the US, Germany, Spain, Japan, the UK, China, and India. However, despite the overall positive pictures, some countries saw their growth targets revised downward, including South Africa, Brazil, Russia, and Italy (as an interesting aside, while the two Asian BRICS countries look to grow more strongly in 2014, the other three were all revised downward).

World Economic Outlook Update, January 2014

Projections

Differences from October 2013 WEO

 

2012

2013

2014

2015

2014

2015

World GDP

3.1

3.0

3.7

3.9

0.1

0.0

Advanced Economies

1.4

1.3

2.2

2.3

0.2

(0.2)

USA

2.8

1.9

2.8

3.0

0.2

(0.4)

Euro area

(0.7)

(0.4)

1.0

1.4

0.1

0.1

Germany

0.9

0.5

1.6

1.4

0.2

0.1

France

0.0

0.2

0.9

1.5

0.0

0.0

Italy

(2.5)

(1.8)

0.6

1.1

(0.1)

0.1

Spain

(1.6)

(1.2)

0.6

0.8

0.4

0.3

Japan

1.4

1.7

1.7

1.0

0.4

(0.2)

UK

0.3

1.7

2.4

2.2

0.6

0.2

Canada

1.7

1.7

2.2

2.4

0.1

(0.1)

Other advanced economies

1.9

2.2

3.0

3.2

(0.1)

(0.1)

Emerging markets and developing economies

4.9

4.7

5.1

5.4

0.0

0.1

Central and Eastern Europe

1.4

2.5

2.8

3.1

0.1

(0.2)

Commonwealth of independent states

3.4

2.1

2.6

3.1

(0.8)

(0.7)

Russia

3.4

1.5

2.0

2.5

(1.0)

(1.0)

Excluding Russia

3.3

3.5

4.0

4.3

(0.1)

(0.1)

Developing Asia

6.4

6.5

6.7

6.8

0.2

0.2

China

7.7

7.7

7.5

7.3

0.3

0.2

India

3.2

4.4

5.4

6.4

0.2

0.1

ASEAN-5

6.2

5.0

5.1

5.6

(0.3)

0.0

Latin America and the Caribbean

3.0

2.6

3.0

3.3

(0.1)

(0.2)

Brazil

1.0

2.3

2.3

2.8

(0.2)

(0.4)

Mexico

3.7

1.2

3.0

3.5

0.0

0.0

Middle East, North Africa, Afghanistan and Pakistan

4.1

2.4

3.3

4.8

(0.3)

0.7

Sub-Saharan Africa

4.8

5.1

6.1

5.8

0.1

0.1

South Africa

2.5

1.8

2.8

3.3

(0.1)

0.0

The IMF update doesn’t specifically address its concerns about South Africa, but these were previously made clear in the organization’s Article IV consultation with SA. In it, the

IMF highlighted a number of weaknesses in the South African economy, including rising government debt, labour unrest, a weak education system, infrastructure bottlenecks, anti-competitive domestic markets, and the sharp divide between the employed and the unemployed.

At the time, the IMF recommended (as it does every year) that SA address its education system, its labour laws, its transport and electricity networks, its regulatory system, and its rising government spending. Its latest WEO update suggests that SA is not doing enough of these things to reassure the IMF that it can boost growth this year.

The IMF is not alone in its concern for the county’s outlook. In a recent note, independent economic consultants Econometrix described a meeting between the South African Treasury and finance minister Pravin Gordhan and a number of independent South African economists on the subject; in a roundtable discussion, Gordhan and his team spoke frankly with private economists about their concerns for the South African economy.

The discussion addressed several major areas. First, they spoke about the recent negativity around emerging markets. As growth in developed economies begins to accelerate, emerging markets (EMs) have seen an outflow of investment. Worse still, EM exports have failed to respond to rising growth in key markets, suggesting that the improved fortunes of the world’s wealthy countries are not having the uplifting effect on EMs they should.

According to Econometrix, some economists hypothesised that financial markets are trying to impose structural adjustments on EMs; specifically, that they are trying to push down domestic EM labour costs. Falling exchange rates were seen as a consequence of this push – since SA won’t lower wages, the rand is falling to compensate. Unfortunately, South African exports have not responded to the weaker rand, instead remaining flat, which is a major worry for policymakers.

On the domestic front, the roundtable discussion focused on South Africa’s puzzlingly low levels of private sector fixed investment – private companies in South Africa seem strangely reluctant to invest in new capacity, despite the obvious opportunities for growth represented by the country’s pool of unemployed workers.

Fascinatingly, Econometrix reported that Treasury is concerned about the impact that minimum wage legislation has had on employment. Citing the example of the agricultural sector, where the introduction of minimum wages was followed by a sharp fall in employment, the gathered economists expressed worries about the incompatibility between the ANC’s twin goals of increasing employment by 6m jobs while simultaneously implementing a general minimum wage. This is a perennial conundrum for SA, and one showing no signs of resolution.

Finally, the talk turned to the topic of industrial policy. According to Econometrix, the gathered economists expressed confusion about government’s focus on the mining and manufacturing sectors to the exclusion of labour-intensive agriculture and small businesses. Said Econometrix, “[T]he discussion reverted to the notion that the government should be encouraging informal activity and small business development far more intensively rather than trying to collude, so to speak, with large companies involved in capital-intensive activities.”

The really interesting part about the Econometrix note is that clearly, Treasury is open to a wide range of ideas and suggestions. It often seems as if government is opposed to outside perspectives on economic management, but this meeting seems to have been a genuine exchange of ideas, some of them starkly different from the usual ANC rhetoric and policy.

As Econometrix put it, “[W]e came away from the discussion quite encouraged with the manner in which National Treasury is determined to assess the economic landscape in a relatively broad perspective. It is … clearly seeking solutions which need not necessarily be of a conventional type, to develop a new growth model which tries to address inequality and lack of inclusivity of the majority more actively, whilst at the same time being aware of the policies which might inhibit more rapid economic growth.”

Very encouraging. 

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