Over the past couple of weeks it has been impossible to escape dire assessments of the South African economy. I’ve read that it is ‘collapsing’, ‘tanking’, and even ‘dying’.
A number of commentators seem to have made it their goal to imagine a worst-case scenario for South Africa, and then argue for its inevitability. Some have gone as far as equating the country to Venezuela and Zimbabwe.
While no one can be unaware of the serious challenges facing South Africa, I fear that we have become so frantic at every piece of additional bad news that we are losing context.
This graph shows South Africa’s GDP since 1960:
This does not look to me like an economy that is collapsing. On the contrary, it looks like an economy that has been quite resilient given how much has been thrown at it. This is an economy that has survived the mismanagement of the Zuma years to be more or less double the size it was 20 years ago.
Despite all the bad news we have been hearing, I am also unaware of any credible economist predicting that South Africa’s economy will not grow this year. GDP growth will be low, but it will be positive.
South Africa is not Venezuela
Many commentators seem to have equated low growth with decline. They are not the same thing. This is what a declining economy looks like:
This shows Venezuela’s quarterly GDP growth figures since the last quarter of 2015 to the latest figures released by the country’s central bank – which were for the third quarter of 2018. Over this period the country experienced 12 straight quarters of negative growth of more than 10%.
It is true that South Africa’s economy shrunk by 3.2% in the first quarter of this year, but despite that, the country’s GDP was still larger than it was at the end of March 2018. On an annual basis, the economy is still moving forwards.
Of course this is not good enough. Just because the country’s GDP is not shrinking is not cause for celebration. It is however reason to be a little more circumspect about how we describe our economic predicament.
As Cannon Asset Managers stated last week in a note to clients:
“In South Africa there is no shortage of talking heads on TV and prophets of doom on social media predicting the imminent implosion of Eskom, the flight of foreign capital and even an IMF bailout. Might these events occur? Yes. But it is pertinent to ask, too, if our fears are driving our willingness to accept certain narratives, and what the ultimate cost of believing those narratives could be: namely, that they become self-fulfilling prophecies.”
We should certainly be aware of the risks that South Africa faces, and nobody should feel any reservations about pointing them out. They should, however, separate short term bad news from the longer term picture.
The most recent analysis from the Economist Intelligence Unit, published late last year, forecasts that real GDP growth in South Africa between 2018 and 2030 will average 3.4% per year. That is the kind of longer term outlook we have not heard at all in the past few weeks.
Unfortunately the commentary we have been receiving suffers from an enormous dose of recency bias – taking the bad news we are currently hearing and extrapolating it into the future. It is a very human mistake to make, but that doesn’t make it any less of a mistake.
The kinds of dire scenarios being painted are, of course, all absolutely possible. South Africa could enter a debt spiral. The country may be unable to attain sustainable growth. The government may end up calling on the IMF for a bailout.
That doesn’t, however, mean that these things are inevitable.
As South African Reserve Bank Governor Lesetja Kganyago pointed out last week: “These things are in our control.”
At the moment, government is probably not doing enough to be certain of avoiding them. That is fair criticism to make. But it doesn’t mean we should assume that nothing can be done. That is falling into the trap of making these predictions self-fulfilling prophecies, because if we resign ourselves to negative outcomes, then we will do nothing to prevent them.
Therein lies the danger of this kind of thinking: it is disempowering.
The graph below from the Organisation for Economic Co-operation and Development (OECD) shows its composite leading indicator – or general outlook for economic activity – for South Africa up to the end of June.
Again, this is again a long-term picture, and again it does not suggest an economy in decline. While the current level is below its long term average, it is higher than it was 10 years ago, and well above its lows over this period. The indicator also appears to be bottoming, rather than falling further.
The issue this illustrates is, once again, one of perspective. It is easy to be caught up in the current cascade of bad news, but we can only make a genuine assessment of our situation if we view it properly in context.
In just the last month, two of the world’s largest companies have expressed their long term view of South Africa not in words, but in actions. PepsiCo’s offer for Pioneer Foods and Goldman Sachs’s decision to expand its South African business are significant votes of confidence.
There is a reality apparent in these decisions to which many commentators seem oblivious. These companies are making long term investments, and they certainly would not do so if they thought the country’s economy was in terminal decline.
I think commentators should take a dose of that reality. Let’s be honest about our problems, but let’s also be honest about putting them into perspective. Most of all, let’s be honest about what needs to be done to fix them, and acknowledge that those solutions are well within our ability to achieve.