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  Mike my friend, I don't think we should look any further than the next five years to realize that the next financial Armageddon is almost ''upon us''. Very, very bearish comments coming out of SocGen...  

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What long-term slow growth means for SA

Mike Schüssler’s thoughts on SA growth during the depressed part of the commodity Super Cycle.

Read Schüssler’s two previous articles:

 

I am of the firm belief that the world has just entered a longer-term downward phase regarding commodity prices of the so-called Super Cycle. The most recent peak of the commodity Super Cycle was in 2011.

It seems that the downward phase may last to 2030 or so – if the typical commodity Super Cycle repeats itself – and this will play a big role in economic outcomes for a commodity exporter and producer such as South Africa surrounded by other commodity exporters.

Historic South African growth during Super Commodity Cycles

Other than the period between 1951 and 1970 the downward phase had a very negative effect on South African growth and well-being. The table below shows that in three of the downward phases in the Super Cycle, growth in the economy was less than half that of a typical upward phase.

The commodity cycle and SA growth over the last hundred years.

Time Period

Economic growth average

Real commodity price average

Cycle Phase

1918-1931

-0.4%

-4.1%

Down

1931-1951

2.1%

19.1%

Rising

1951-1970*

8.4%

-0.8%

Down

1971-1980

3.7%

41.1%

Rising

1981-1999

2.0%

-1.1%

Down

2000-2011

4.1%

19.5%

Rising

2012-2016**

1.7%

-8.0%

Down

See note at end of article

Note all averages are based on compounded growth over the period.

* Gold, which is excluded from commodity price indices, was fixed as was the rand which allowed for certainty and gold made up more than 75% of commodity exports over this time.

** 2016 is a forecast based on the latest IMF forecast for growth and the last three months of 2015 as an average for 2016 in commodity index

The upward phase of the cycle in the 1970s had an average growth rate of 3.7% from 1971 to 1980.

This was lower than the exceptional downward phase before but also saw the start of sanctions as well as the oil crisis after 1973, when the landlocked part of South Africa saw huge increases in transport costs as oil rationing and speed restrictions hit the economy hard. It was also the time when our biggest import rose from $3 a barrel to over $12 a barrel in two years, while the exchange rate was fixed.

So, despite problems with inflation, South Africa still benefitted from the upward commodity cycle and by the end of 1980 gold made up two-thirds of our mining exports and just less than half of all our exports.

From 1981 to the start of 2000 growth in SA averaged only 2% per year. Internal civil strife and sanctions also played their part, but the commodity price declines (this time including gold price declines) played a major role in slowing the economy.

During the last upward phase of the commodity cycle from 2000 to 2011 – despite the great financial crisis in 2008/9 – GDP growth averaged 4.1% – more than double that of the downward phase.

At present the average growth rate is 0.7% (to 2016 using the latest IMF forecast) and most long-term forecasts do not see growth of more than 2.5% in the next few years.

I suspect that the period between 2011 and 2030 will see growth average about 2% per year (maybe less). The population growth rate is 1.7% and growing, which indicates that modest per capita growth can be expected.

A per capita growth of less than 0.5% would be disappointing to the aspirations of most South Africans and that will in itself bring its own problems.

What long-term slow growth means: Part 1

South Africa is already struggling to do the basic things with the money we have. In the slow growth environment it is likely that more people will not get what they want.

Employment remains the number one problem

We are entering this slower growth environment with an extremely highest unemployment rate. This is dangerous as politicians will find it hard to keep promises of more employment and certainly more employment and higher pay.

Pay may rise, but in real terms it will be difficult to maintain the positive real increases that many in South Africa enjoyed in recent years. The huge government wage bill will become a problem and will have to be addressed and that will bring its own political challenges.

State-owned companies’ wage bills, as well as university and other agency wage bills, will have to decline as a percentage of income.

It is very likely that unemployment will rise and the best potential growth will be in the small businesses and informal economy. It will also mean that those sectors that export outside the commodity sectors could be the new sectors that people aspire to. In my book this looks to be mainly food and beverage sectors and certain services. It will however not employ masses of people and that is where the critical aspect of this downturn lies.

I think politics will become more fragmented and volatile and professionalism will have to count for more.

We have already watered down the definition of unemployment and employment – but the number of people unemployed will reach 10 million in the next few years and by 2030 could even have doubled from current levels. Hopefully the export push will help, but unless people have the efficiency and professionalism needed it is difficult to see how the unemployment numbers will stay below 10 million.

Government spending will have to be cut in real terms

During a low growth period the state’s ability to grow revenue will be impeded and any large tax rises will have a much bigger negative effect on growth.

This means that government spending will have to be cut and that will have to include the total wage bill – at least in real terms. Government will have to look at increasing its efficiency and that of the country too. The large social security payments will probably remain, but increases in the payments will be negative after taking inflation into account (ie in real terms there would be a decline). 

This will also mean that programmes such as the National Health Insurance will not become part of overall State spending unless taxes rise to such an extent that the last comma points of GDP growth are squeezed out.

The government will also end up outsourcing and entering into partnerships more often than before. Privatisation will be part of the policy mix again as the money for loss-making State-owned enterprises will not be there.

Further downgrades are more likely during the downward phase of the commodity cycle and that means that government debt payment will be the fastest rising expenditure item and that will further squeeze real government spending.

For citizens in SA the fact is tax rates will remain high and you can expect to pay more from your pocket for school, roads, and water and lights, as government and its agents look for more ways to save costs and allow the user-pay principal to rise evermore for things like health and education.

Next article: More effects on SA in the downward phase of the super cycle.

*Note: I left out the period 1951 to 1970 when the giant gold rush helped SA grow and the average growth was but 1.1% during a downward phase and 3.7% during the upward phase of the commodity Super Cycle.

For South Africa during 1950 to 1970-odd the gold price in US dollars was fixed, as was the exchange rate, bringing certainty to gold mining and it grew rapidly to where SA produced about three quarters of the world’s gold and it was more than three quarters of our commodity exports.

Gold made up more than 75% of SA commodity exports, which at times was over 60% of all exports during the 1960s and a large part of the 1970s. We also benefitted from the rebuild of Europe as well as the massive worldwide introduction of Keynesian deficit spending.

This is the one era that certainly does not fit comfortably with a downward commodity phase and was the fastest growth period ever in the last 100 years since data was kept on GDP. This stronger growth in the downward cycle was an exception and not the rule.

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Kyle O'Haher

Kyle O'Haher

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   6 comments

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Thanks Mike, I have predicted low growth/high inflation 3 years ago, which you seem to confirm now. Question is how one protects one’s capital in such an environment?

Depending on your view of the $/ R offshore might be an option. You get global growth with the FX kicker + sovereign risk diversification. If SA get downgraded the scenario gets very scary for those folk with local investments and assets. I also think that prescribed investing by the government can’t be far off as the petty cash box runs dry and they try to meet all the voter expectations. PPP is not on the cards, it means giving up control of state assets (SAA, ESCOM etc) and I cant see the government doing that, no matter how dire the situation

Things are not looking good for commodity shares, if it wasn’t for the weak rand they would all have gone out of business already. I’d rather buy some of the Industrial shares recommended on EasyStockPicker.co.za

i think its also important to note that this downturn will occur at the same time as what some are calling the “4th economic revolution”. By the time we come out of it very many industries will be automated and there will be little need for the mass employment currently seen in SA’s commodities industries. There will therefore be far less trickle down effect and presumably far less positive impact on growth.

The time has come for SA to have a long hard look at what it wants to be in the year 2050 and how it will get there

There are many challenges. However this will go a long way to bring peace and prosperity over the long term. Double even treble our efforts in education. Especially trade schools. They need to be comprehensive in what they offer students. They must do like the nationalist government did in the early years and offer students boarding, accommodation, meals, transport and education. The reward is that educated skilled people very quickly make a valuable contribution and grow the economy. 

Mike my friend, I don’t think we should look any further than the next five years to realize that the next financial Armageddon is almost ”upon us”.
Very, very bearish comments coming out of SocGen Paris and predictions that the US equity markets could drop 75 % this year.
Another shocker today from Coronation Asset Managers, that dropped a ”ZAR 13 billion log”. I wonder what this would have been if not for the massive support they got from their rand-hedge holding!
I must also add that I am not totally convinced that we are drawing the right conclusions from the period 1951 to 1970, when the AU and Dollar/Rand (GBP/ZAR) was fixed, as the AU only started peaking 10 years thereafter
Brett Kebble, if he was alive, would have told you that ”South Deep ” is a very deep ”black hole” that he poured billion is, despite the automation and mechanical assistance that they required to mine gold, as it seems that not a lot of miners wanted to work down there.
It is also still my view that the hedge banks (and Investec) were the only ones that walked away with a lot of money, as they convinced a non-astute Brett to hedge 12 years production with, in my view an highly controversial (due to fact that production is sold 12 years forward and the accounting liability is not/cannot be calculated in line with accounting standards) also ‘‘naked option” gold derivative with an infinite upward loss potential.. Nobody will ever convince me that if Brett knew his loss will exponentially rise from ZAR 70 million to ZAR 4 billion he would have done it and/or sold out of it when it became apparent that the gold price has started to take off. Even the guy who sold me a newspaper every morning, informed me that you must be long physical gold.

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