Hyperinflation?  Unless you have lived through it, you probably don’t realise how scary it can be.   We know that with the relatively mild inflation we have in South Africa a lot of things become steadily more expensive.   But look to the north at Zimbabwe: it is very recently, less than a decade ago, that the country’s currency accelerated into ruin, with banknotes having so many zeroes on the end of the number that it was a source of ridicule and amusement.  Unless you were living there, watching your savings being eroded, having too little value in your banknotes to buy food and support your family.

‘When Money Destroys Nations’ by Philip Haslam and Russell Lamberti was launched this week, and is an accessible, well researched and terrifying look not just at what has happened in the past – in Zimbabwe and elsewhere – but also at the causes of hyperinflation – governments spending above their means and printing the money to meet their obligations.

It is easy to dismiss Zimbabwe as a joke of a country, run by a brutal and increasingly barmy dictator.  But the United States has the largest world’s reserve currency, and it, too, is printing money far too fast – to fund spending which is far too high.   And the same financial folly can be seen elsewhere, too.

As the authors conclude:  “Hyperinflation is the ultimate in economic chaos and disorder, leaving in its path economic ruin.”

This is an excellent and informative book.  Send it to your ministers, bureaucrats, economists and economic commentators.

The horrors of Zimbabwe were not unique and a similar scenario elsewhere may be far closer than we think.

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I must first declare an interest.   In the first half of this year I worked as part of the project team for this book.

‘Half Way There’ is being launched this evening.  It is a book on the five-nation BRICS alliance, exploring the political, economic and social structures in these five nations – Brazil, Russia, India, China and South Africa.

The authors are Chris Hart and Glenn Silverman, and along with their Investment Solutions colleague Lesiba Mothata, they visited all five BRICS nations to explore not only how these countries fit together – or not – but also the complexities of each individual country.

‘Halfway There’ is an excellent title.  Where are the BRICS going, and what progress are they making?   Is this a convenient club uniting an anti-Western grouping of nations, or is it something which will develop its own reason for existence, in economic terms?  All these questions are addressed.

There is also a series of analytical tools which are used by the authors to probe below the surface of each country, with possibly the most impressive being the concept of National Scars.   These are the issues or eras which have scarred each nation, and which form the backdrop to their policies of today.  In South Africa, the scar is apartheid, and similar scars have been identified for the other BRICS as well.

Many other clusters of nations have emerged since the BRIC grouping (later to become the BRICS) was identified by economist Jim O’Neill.  But the BRICS now have their own development bank, a business council, and regular summits.

The grouping is important to South Africa, which arguably is too puny a nation to really belong in this club.  I was lucky enough to sit in on many of the research meetings with CEOs, academics and others as the team did a thorough job of researching their own country, looking at it through fresh eyes.

Chris Hart and Glenn Silverman are both impressive individuals and took on this marathon task in a short time period, not neglecting their day jobs. Together they led a team of talented people, and it is a remarkable achievement that this book has now been written and published.

This is an excellent and important book.   Buy it.

Tweets of the Day:

Funny Tweets (@Funny_TweetsQ):  Could you please put your crying kid on vibrate?

Ellen DeGeneres (@TheEllenShow):  What do you call a deer with no eyes? No eye deer. #ClassicJokeFriday

Male Thoughts (@SteveStfler):  I broke up with my gym we were just not working out

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In a cupboard at home I have two old DSTV decoders, which at the time I bought them seemed very advanced.  I also have a cassette deck, a laser disc player and piles of old VHS tapes, which I will get around to throwing out sometime.  The emerging generation would probably collapse in a fit of laughter and ridicule if they could see the number of CDs I have bought over the years, and they knew how infrequently I listen to them. And don’t get me started on my Betamax video tapes….  Ironically, I got rid of most of my vinyl records, and vinyl is making a comeback.

I would probably be able to retire by now if instead of buying books and magazines, tapes and records, discs and cassettes, I had instead put the cash into shares, the bank or even on the horses.

However, that is the past and just as I was excited and delighted by every purchase I made over the past decades, I couldn’t help but be tempted by some of the new black boxes which have recently been launched in South Africa.

One from Times Media promises a great library of films and TV show, while Altech’s new Node will not only offer an array of entertainment; it will also have all sorts of other facilities for turning my dumb house into a smart one.

The computer is becoming king in the world of entertainment, be it a normal-looking laptop, a tablet, a smartphone or one of these black boxes.

I have bad news for advertisers – I hardly ever watch TV shows live anymore.  It is more convenient to record them on my current DSTV box, and then watch them later, fast-forwarding through the adverts as I do so.

The real breakthrough will come once my home is connected to an efficient line along which data can be squirted, although at least one of the new boxes appears to use satellites to load the material, while offering other connectivity which does not rely on a fixed line.

A tech-savvy friend of mine has no subscription to any local TV services.  Instead he has devised a way of tapping into US sites where he can enjoy a vast choice of TV shows and films for a negligible fee.   He has a good data link, and that is the crucial factor.   He can’t watch SA Idols, or Big Brother Africa or the local version of Masterchef – which is arguably more of a benefit than a disadvantage.

So I have seen the future, and as the tech companies tie up with the content providers and the telecoms firms, this revolution will continue.

A report from PwC last week identified data as the big growth area in ZA telecommunications, and this came as no surprise to anyone.

What is certain is that the way we more affluent South Africans package and stream our home viewing will change a lot over the next few years.

What is also fairly certain that that whatever new black box I buy in the next year or so, a few years after that it will take its place alongside all the other boxes in the cupboard, as my house continues to become far smarter than I.

Tweets of the Day:

Fake Dispatch (@Fake_Dispatch):  Due to a mix-up during the clean-up of a big coffee and milk spill at Starbucks, the company’s newest size is served out of a mop bucket.

The QI Elves (@qikipedia):  I like coffee because it gives me the illusion that I might be awake. – LEWIS BLACK

Funny One Liners (@funnyoneliners):  My dog is like one of the family. And I’m not saying which one.

Ellen DeGeneres (@TheEllenShow):  What did the duck say when she bought lipstick at the department store? Put it on my bill. #ClassicJokeFriday

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Manufacturing data out today from Stats SA show that July saw drop in manufacturing output of 7.9% – the biggest year-on-year fall since October 2009.  We also had numbers on mining today, showing a 7.7% year-on-year fall in July, compared to a revised 5.4% drop in June.  While there have been some signs of an improvement in business confidence, these official figures present a worrying picture, as mining and manufacturing are two crucial sectors of the economy.   What do our experts make of it?

Mike Schussler from economists.co.za:

Manufacturing is now at 11% of GDP down from 17% of GDP six years ago. The strike has knocked the industrial base of South Africa very hard and the Neasa lockout will still play a role in August, and possibly this month – so manufacturing is not going to see the recovery we are hoping for. For all the incentives from the dti, the weak Rand, and low interest rates, the sector is still below the level of early 2008! This is hard life for those involved – and it shows – as the employment levels in manufacturing are down to levels seen in 1971/2. After 42 years of industrial policy and growth programs the sector continues to shrink.  Perhaps we have a lesson to learn, and that is that firms cannot take endless abuse and punishment from those they employ, and endure rules that make life difficult for big firms who need a host of lawyers to get through B-BBEE and other legislation. Never mind the small and medium sized firms. Add poor service deliver and infrastructure challenges – read electricity, roads, and water supply shortages.  We may in fact be at the start of a big reality check!

Professor Raymond Parsons, North West University Business School:

The larger-than-expected fall in manufacturing output confirms, if confirmation is needed, the significant cost to the economy of the recent steel and engineering industries strike. Manufacturing output will undoubtedly recover in the months ahead but SA will now be lucky to reach 1.5% economic growth in 2014 as a whole. Other forecasts of 1.7%, 1.8% and even 2% growth this year are looking decidedly optimistic, unless there is a strong economic surge in the next few months. The current poor performance of the manufacturing sector also reinforces other two things: firstly, the message of the recent WEF Global Competitiveness Index in ranking labour relations in SA at the bottom-of-the-class, and secondly, that the MPC meeting next week would be wise to leave interest rates unchanged for the time being.

Nedbank Economic Unit:

While the decline in manufacturing came off a high base in the same month in 2013 and was also partly due to the metal worker’s strike, the figure was still poor.  The performance of the manufacturing sector will remain lacklustre in the months ahead. While output growth could be boosted by base effects, improving global demand and a weaker rand, this will be offset by weak domestic demand.   Today’s data, both mining and manufacturing, show that the production side of the economy remains very weak. The Reserve Bank still faces the dilemma of striking a balance between weak growth and heightened inflationary pressures. We believe that the SARB will raise interest rates by another 0.25 percentage points in November, but this will depend on the inflation trajectory and the movements of the rand at the time.

 

Investec:

The metals and engineering strike, in place from 1 – 29 July, will have accounted for much of the contraction in manufacturing. The plastics and metals industries and the electrical machinery and equipment industries were directly impacted.   The short-term, negative effects of the strike will dissipate in subsequent months as production returns to normal. However, based on the advance indications provided by the PMI, activity remained suppressed in August.   Production is being constrained by high operating costs, weakening domestic demand and sluggish export growth. An additional constraint on production pertains to the slow implementation of the government’s infrastructure programme and non-compliance with public procurement policy and regulations.  Subdued activity in both the production and consumption sides of the economy, and relatively weak economic growth prospects going forward, favour an unchanged interest rate decision next week.

Conclusion:

The twin slumps in manufacturing and mining are disturbing.   These sectors are not growing, and future growth may be accompanied by more mechanisation.   These M&M numbers are not sweet at all.

Tweets of the Day:

Will Rodgers (@WilliamRodgers):  *Reads about a Salmonella outbreak on lettuce -NEVER eats Salad again! *Reads about the dangers of Alcohol poisoning -NEVER reads again!

carl reiner (@carlreiner):  A memorable event at The Chinese Theatre, made so by creative Mel Brooks placing his hands in cement- one hand had 5 fingers, the other, 6.

Funny Tweets (@Funny_TweetsQ):  Knock knock. Who’s there? Chooch. Chooch who? No need to be such a train about it.

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Some pretty worrying numbers from the World Economic Forum’s latest global competitiveness report, which saw ZA slipping a few places down to 56^th position.  While we shine in various indicators linked to our financial services, we score terribly in terms of labour relations –where we are 144^th out of 144 – and in terms of maths and science teaching, again 144^th.

An alarm bell or just another bunch of meaningless stats?  What do our experts have to say?

 

Glenn Silverman, Chief Investment Officer at Investment Solutions and author:

As our book ‘Half Way There’ details, SA has been losing ground steadily over time in the WEF Global Competitiveness surveys. The latest release confirms that worrying trend. The world is an increasingly competitive place & SA competes not only with, inter-alia, the Asian tigers, but indeed increasingly with our African neighbours, too.  Our book, due for release in SA in October, highlights the areas in which each of the BRICS, SA included, score well and badly – looking at the Top 10 areas of strength & weakness for each.   SA ranks number 1 in a number of areas/aspects, primarily around our Financial Services sector, but also ranks amongst the worst globally in other areas, typically relating to education & labour relations.  Our book suggests that SA needs, in the simplest terms, to do the following to improve our global competitiveness rankings: 

•  Protect our areas of strength, namely the Financial Services sector to maintain our current rating, and simultaneously  

•  Work on our areas of weakness. Where we are ranked worst in the world it would arguably not take much to improve such scores materially, with some concerted/coordinated policy support/initiative  

We thus propose setting targets to improve our rankings by say 20 positions every 5 years to ensure/ indicate/monitor our progress.

 

Mario Pretorius from Telemasters:

Schooling is what got the Prussians ahead in the arms race – the 3R’s made obedient and functional soldiers. The British introduced some compulsory schooling for Industrial Revolution workers.  Since then, the last on which kids are formed has not changed much – those who did not fit the obedient, timely and repetitive worker mold are ejected into the economically inconvenient pool.  Is ZA schooling still relevant?  Yes – to those wanting traditional employment.  Yet the structure of no inculcation of Western liberal economic thought with a painful dose of responsibility, accountability and self-reliance that typifies the rural school system will lead to tears, disappointment and a revolution of the wrong kind. The real world is so far removed from the 12 year stint as a youth and a student that the schooling becomes irrelevant, and measurable so.  ZA will race to the bottom with no prospect of recovery – money wasted, lives spoilt and opportunities lost for another generation.  Unless the schooling ethos of entitlement, solidarity with causes and an expectation of something-for-nothing is stamped out. The race is on – in the wrong direction – for the country’s peace and prosperity.

 

Prof Raymond Parsons, North West University Business School

The fact that the latest WEF survey of SA’s declining global competitiveness reaffirms what we already know about our economy is not a reason to minimise its message – SA needs to get its act together!  The good news is that, as part of the Cabinet’s NDP implementation plan, Minister Jeff Radebe in the Presidency is charged with assessing whether existing and new legislation is compliant with the NDP.  It is up to the private sector to use this opportunity to now leverage the latest WEF findings, together with other inputs, to address the specifics of the serious unintended consequences for business confidence of proposals like the ‘protection of investment’ bill and the new visa regulations.  On labour relations, where SA scores 144 of 144, we need to see constructive leadership from both employers and trade unions.  Finance Minister Nene must be encouraged to craft his mini-budget next month to address what the WEF is saying about the deteriorating macro-economic environment.  It is not enough to just throw up one’s hands in despair but to vigorously use every platform to drive home the message that, if we want to enlarge our share of world trade and investment, we have to remain globally competitive. ‘Smart governments encourage smart investment’ rightly comments one leading analyst.

 

Economist of the Year Ulrich Joubert:

My view is that if we do not get the quality of our training and education system at an improved level, it puts a ceiling on our competitiveness and growth potential in the longer term. We have already lost twenty years and it will take a long period of time before we can expect to see the results of an improved education system. If we do not succeed in providing quality training and education we are going to lose also the advantages in those spheres where we are currently still competitive – like the financial sector.  Furthermore it is of utmost importance to adjust our labour dispensation  – otherwise we are going to lose more and more jobs in coming years. The trends that I notice indicate to me that we will see a rising trend of unemployment in coming years. First of all due to the lack of training and skills and secondly given the salary and wage increases in excess of inflation but especially in excess of productivity improvements.  Thirdly, it is important to limit the state intervention that we have currently in all layers of the economy. 

 

Ian Cruickshanks from the SAIRR:

This is a tragic reminder of the state of inefficiency in parts of the ZA economy, confirming circumstances which emphasise the burden on business – particularly where it interacts with the public sector.  ZA will not attract foreign capital until these inefficiencies are removed, and if they are not, the economy will remain in sub-optimal growth, with government unable to deliver the necessary infrastructure for development.   In this scenario, and with a distressed world economy, SA will be lucky to grow GDP by more than 1% this year.  Meanwhile, job creation on the scale envisaged by President Zuma will remain a pipe dream, with increasing demands for social benefits ratcheting up a higher government budget deficit, which will be increasingly difficult to fund.  

 

Loane Sharp, Economist at the Free Market Foundation:

The latest WEF rankings indicate that South Africa has a vibrant and competitive private sector characterised by excellent governance mechanisms, deep capital markets, and high levels of efficiency and sophistication.  On the other hand, South Africa’s public sector is in a state of chaos and its institutional structure is crumbling.  Government-provided services such as education and healthcare are exceptionally weak, the labour market is uncompetitive, and the public sector is generally characterized by corruption, wastefulness, and mistrust and uncertainty surrounding laws and regulations.  The WEF rankings provide a strong case for introducing private sector management and discipline in the public sector through such vehicles as public/private partnerships (PPPs), targeted deregulation and liberalisation, and selective privatisation.

 

Mike Schussler from economists.co.za:

I think the fall of SA in the rankings will continue until we address the real problems in the economy – as low interest rates and big deficits are keeping growth afloat. There is no way we will not fall further as our growth rate will again disappoint this year and the financial sector will get another knock after ABIL etc. Education may find improvement, and a few other aspects too, but overall my sense is that SA infrastructure is getting used up, as is the goodwill the country has.  It is a problem for us it that things that helped – such as cheap and reliable power and good roads and plentiful water – are slowly coming apart.  Companies are seriously looking at other countries for their African head offices – and that may be in Kenya, Nigeria, Ghana etc.   The extra rules and regulations, such as the new visa requirements, will pull us down, too.  The new BBBEE codes are again hindering – and so too are the new labour laws, which outlaw labour broking for more than three months.  SA’s economic performance numbers in growth, inflation, employment etc are also slowly in decline.

 

Conclusion:

The future of this country depends on good education, and we are failing dramatically.   And current investor confidence depends on a stable workforce, which is just a dream at the moment.  If we fail to compete globally, we fail.   Full stop.  

 

Tweets of the Day:

The QI Elves (@qikipedia):  Geologists are never at a loss for paperweights. – BILL BRYSON

Ellen DeGeneres (@TheEllenShow)_:  What do you call 4 dolls waiting in line? A barbiecue #ClassicJokeWednesday

Dr Chester Missing (@chestermissing):  Guptas become diplomats in Lesotho. A few weeks later Lesotho has a coup. Can we send the Guptas to Swaziland next?

 

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Discovery CEO Adrian Gore today gave an impressive overview of a business which he has grown from a small South African insurer into a world-leading insurance model and a multi-billion dollar business.   Discovery, of course, has developed a way of rewarding people who make an effort to reduce their risks – through healthier habits, better driving and so on.  

Gore explained that people now have an expectation that companies should be a force for social good. He suggested that health care is now the biggest industry in the world, and is both massive and relevant to the wider society.

Nature of risk is changing due to behaviour. Smoking, poor nutrition and poor physical activity, plus alcohol are risks, and people need to grasp this.   However, his research shows that even people with many chronic conditions think they are in good health. On the roads, 81 percent of people say they are good drivers, but only 33 percent actually are.

Gore gave some fascinating insights into how Discovery’s data gathering has come up with some interesting information:

Safer drivers manage their health better.

Smokers are worse drivers.

People that manage their health manage their credit better too.

Data from PnP and Woolworths shopping baskets help to match information on diet to health – a powerful data set.

Discovery Insure has developed a smartphone application to monitor your driving – developed with MIT in the states.

Data shows women drive better than men.

Certain car types attract certain (good and bad) types of driver.

 

Conclusion:

The numbers were impressive But investors are likely to have been reassured that here is a company which does so much more than just sell products.   It is spreading through Europe and the US to China and now wider in Asia through partnership models. This is world beating South African know how.

 

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A new airline FlySafair will soon start flying in SA.   For the consumer, this should mean more affordable fares, as it is offering attractive prices at its launch.   To find out more, ZA Confidential spoke to the CEO of FlySafair Dave Andrew.

DAVE ANDREW

 

ZAC: What impact do you think your arrival on the scene will have on the air travel market?

DA:  While FlySafair is committed to offering the lowest fares possible to make air travel more accessible to a greater proportion of the South African population, we anticipate that our entry into the market will help in driving airfares down in general. Either way, the traveling public benefits.

 

ZAC:   Why has it take you so long to get going? 

DA:  The unfortunate delay in launching our service last year gave us the opportunity to further evaluate the best possible way to structure our fares.  In keeping with the best current international thinking on low cost airlines, the unbundled approach not only achieves this but also allows our customers more choice and hence our motivation to implement. We also needed to assess the market to ensure our brand was successfully launched.

 

ZAC:  You are offering attractive fares of around R500 each way on the JHB to CT route, but at what cost?  Is safety being compromised?  Will passengers be crammed in like sardines?  And what extra charges will there be for food, luggage and so on?

DA: While a great deal of our flights are offered at these low prices, it is important to note that not all our tickets are sold at those prices. Since establishing Safair almost 50 years ago, safety has always been our top priority. We would never comprise the safety or maintenance standards of our operations, passengers, crew or aircraft – no matter what the cost. Our low-fare prices will have no impact on any of our internal services, including the maintenance and safety of our aircraft.  Aside from not compromising on safety, we are also committed to ensuring our travellers experience comfort at all times. We will be flying a Boeing 737-400 aircraft with165 comfortable seats. Aside from our competitive prices we are also offering passengers the option to purchase a bag at a cost of R150, an extra bag at R250, Sport equipment at R280 and a ticket alert SMS at R5, preselected seats R40 and also Extra Room seats R100, and catering will be sold on board.

 

ZAC:   What numbers will you be carrying at the launch?   And how do you hope to grow?   Within ZA and beyond?

DA:   Online booking thus far have been good and we are expecting these to continue until the launch and beyond. We are continuously investigating the possibilities regarding expanding our routes and fleet. To date we have had numerous requests already for flying to various other destinations – indicating that the room for growth is promising.

 

ZAC:   How easy is it to book with you?   Are you offering or planning to offer a package of services including accommodation and car hire?

DA:  You can find us online at http://www.flysafair.co.za or phone our call centre at 087 135 1351. We can even take care of your vehicle rental needs as we have partnered with First Car Rental and together we are offering FlySafair passengers really competitive prices on both flights and car rental.

 

ZAC:   One frustration for passengers is the time it can take from the plane landing to the baggage carousel if the plane is not docked alongside the terminal and people need to be bussed to and from the terminal.   As a latecomer have you been given the worst slots?

DA: We have been allocated bays according to the Airports Company Policy and they have a schedule where they try and accommodate all airlines fairly.

 

ZAC:    Are you mainly targeting the leisure traveller or business folk as well?

DA: With competitive prices we are hoping to target everyone who would like to fly.

 

ZAC:    What have been the challenges in recruiting pilots, cabin staff and check-in people?

DA:   We have been very fortunate that we have been able to employ skilled people that have previous airline experience.

 

ZAC:  Do you expect more new entrants?

ZA: Yes, the industry will always be competitive, with a many companies out there wanting to start an airline.

 

ZAC:  We have seen a number of airlines come and go.   It is a challenging business here in ZA and internationally.   How confident are you that you are here to stay?

DA: Yes, it is a challenging business indeed. We are confident that we can successfully manage the challenges that operating a scheduled airline in South Africa entails. Our commitment extends to providing exceptional service as we have been doing for the past 49 years.

 

Conclusion: 

Competition is always a good thing, and as long as this new airline offers good value and efficient flights, it has a good chance of grabbing a share of the market, or expanding it.  The proof of this pudding will be in the flying……

 

Tweets of the Day:

The QI Elves (@qikipedia):  In 2012 a hamster named Smurf stored a magnet in his cheek and was later found stuck to the bars of his cage. qi.com/infocloud/hams…

Funny Tweets (@Funny_TweetsQ): HAVE SOME FUN WITH YOUR LIFE: Call in sick to places you don’t even work at.

Steve Stifler (@SteveStfler):  I’ve found that jogging is much more fun when you never do it.

 

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Data out today show that in the second quarter of this year, the economy expanded slightly – by 0.6% quarter on quarter, seasonally adjusted, annualised, compared to a fall of -0.6% in the first quarter.  This is feeble growth, but it does mean that technically a recession has been avoided, as this would have required a fall in growth for two consecutive quarters.   What do our experts make of it?

 

Mike Schussler from economists.co.za:

Manufacturing and Mining are in recession. Private construction according to the buildings completed statistics declined with 50.7% in the 2nd quarter so all construction growth in the GDP numbers is from government and State Owned Enterprises, which means that overall this is a state-led growth which will not be sustainable as prices for power rush up and tax revenue declines radically.  Four sectors recorded declines in the 2nd quarter.  We may not be in recession but we are certainly not out of trouble by a long way. SA is dead in the water when it comes to job growth. Trade and Electricity joined mining and manufacturing in declining in the 2nd quarter. (As did private sector construction). Without government expenditure increases and construction by State Owned Enterprises and agencies we would have recorded 0% growth. Taking the private construction sector decline into account it is probably now the 2nd quarter in a row that the private sector declined. The tax revenues are going to decline and the government deficit as a percentage of GDP is likely to stay above 4% for the next two or three years.  Moreover SA GDP growth has averaged less than 2% over the last five years and this year will not be better – probably worse, at under 1.5% for 2014. We expect to compete with other countries as an investment destination as our growth may be better than Europe, but not anyone else.

 

Prof Raymond Parsons from NW University:

While we should be pleased to have escaped a ‘technical recession’ by the skin of our teeth in the 1H2014, it is true that there is nothing to be complacent about as we drift along at the bottom of the business cycle. Unpacking the negative economic sectors is not a pretty picture. While there will obviously some welcome ‘bounce back’ in some of business sectors in the next few months I agree that SA will be lucky to enjoy a growth rate of about 1.5% for 2014 as a whole. It has all the makings of a ‘low growth trap’, unless….? As we now embark on another bout of economic self-flagellation, I would also counsel that – given the poor growth outlook, and with inflation easing slightly, as well as the Fed’s Janet Yellen still being very cautious – we forget about any further interest rate increases in SA for the time being. 

 

Annabel Bishop of Investec:

The manufacturing sector contracted by 2.1% and the mining sector by 9.4% as work stoppages caused by strike action and electricity constraints caused a GDP outcome close to 0% qqsaa.  On a year on year basis the economy saw weak growth of 1.0% in Q2.14 and 1.3% y/y in the first half of 2014, which does not bode well for 2014. Over the past few years South Africa’s economic growth has been deteriorating substantially, and GDP growth is at risk of approaching the 1.0% y/y mark this year after recording 1.9% y/y in 2013, 2.5% y/y in 2012 and 3.6% y/y in 2011. Strike action and reduced supply of electricity has slowed production, while real household consumption expenditure growth has deteriorated on weakened financial health, waning demand, and flagging manufacturing production.

 

Nedbank Economic Unit:

The outlook remains murky.  Recent economic indicators suggest that the weakness continued into the third quarter, with the NAAMSA strike disrupting manufacturing output throughout July.  Consumers are generally expected to remain cautious given pressure on household income, rising debt service costs and a deteriorating job market.  However, the mining and manufacturing sectors should fare better off a low base, supported by some improvement in global demand.   Although South Africa avoided recession, underlying conditions remains generally weak and confidence is still very fragile.  The risk to the growth outlook therefore remains firmly on the downside.  At the same time, inflation has turned the corner, helped by a slightly firmer rand and falling food prices.  Although encouraging, the inflation outlook is still uncertain given that the rand remains vulnerable due to the country’s relatively large budget and current account deficits and possibility of further sovereign ratings downgrades at a time when global risk appetites may change abruptly in response to changes in US monetary policy.  The MPC will probably continue to move cautiously.  We still expect interest rates to increase by another 25 basis point in November, with further tightening in the second half of 2015.

 

 Conclusion:

South Africa is within a small statistical error from being in recession.  The feeble current growth rate is not going to create the jobs we need.  The crisis deepens.  

 

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We were struck by the introduction to a recent Frontier Advisory conference by its CEO Martyn Davies, who pinpointed the way in which the ZA manufacturing sector has been in relative decline as a share of the total economy. So we asked him for a few details…. 

ZAC: You speak of de-industrialisation in ZA. When did it start and how far has it gone?

MD: The de-industrialisation trend has really accelerated since the political-economic opening of the country after 1994. To an extent this was to be expected, as the economy was exposed to increased competition. But arguably de-industrialisation has been exacerbated by poor policy choices, lack of direct/indirect support for the manufacturing sector, and increasingly belligerent unionised labour.

 

ZAC:   It seems we are not alone.   You are suggesting that this happens elsewhere in the developing world?

MD: Whilst other emerging countries (in Asia) have also experienced similar pressures, their economies have been able to “graduate” into services, whilst maintaining very low unemployment levels. Examples would be Singapore, Malaysia, Taiwan, Korea – amongst others. South Africa has not been able to relocate labour out of manufacturing into other productive economic activity.

 

ZAC: How is it a problem?   Surely if high-skill industries such as financial services are replacing manufacturing in the economy that is a good thing?

MD: It is a problem if the workforce is not adequately skilled to move into financial services and unemployment becomes “structural” –i.e. almost a permanent fixture in the economy. Reinforcing this trend, the bureaucratic state has stifled the growth of small business through over-regulation thus preventing new areas of employment opening up.

 

ZAC:   Government in ZA seems determined to see re-industrialisation through incentive schemes, targeting support for industries such as the auto sector, film making and so on.   Is de-industrialisation a trend which can be reversed?

MD: Government needs to enable and support parts of the economy to spur manufacturing growth. It is primarily skills and liberalisation driven – not intervention and subsidy – although that latter can assist in building and promoting sectors. But much more needs to be done when it comes to labour reform and skills development, which is sorely lacking.

 

ZAC:   Waves of industrial action seem to be encouraging employers in manufacturing, and other sectors, to favour more automation.   Do you worry that if we can achieve re-industrialisation in SA it might be with far less employment?

MD: This is the undoubted trend. Militant unions with political complicity are contributing to this trend. If not mechanization, manufacturing will simply take place somewhere else.

 

ZAC:   What opportunities might there be for ZA in China’s expected de-industrialisation?

MD: There is enormous opportunity to attract jobs away from China – especially in low value manufacturing – to Africa. One would expect SA to have a leading position to leverage toward this end but rigid and unionized labour alongside unfavourable legislation means that we are unlikely to benefit from this significant shift in manufacturing employment in China….despite the unprecedented opportunity that it presents.

 

Conclusion:

This is very important but worrying analysis in the context of this country’s crying need for more jobs and greater economic growth.  

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 A new survey by the Manufacturing Circle, a lobby group of ZA manufacturers, warns that the short term outlook for the sector is bleak.

Some 74% of manufacturing companies surveyed said job cuts are likely over the next 12 months.

Pan African economist Iraj Abedian, who presented the findings, said reasons for the pessimistic outlook include labour market uncertainty – particularly the platinum strike – elevated wage and input costs, competition from imports, low labour productivity, a lack of skills and faltering consumer spending.

Some 67% of respondents said conditions were “weak” or “poor” in the second quarter of the year, compared to 52% in the corresponding quarter in 2003.

Abedian said the short term outlook is negative as well, and the outlook for the next two years is also not favorable. So there is a declining optimism in the sector. This is a national issue that has to be dealt with. This erosion of optimism comes from many segments of the cabinet.

Abedian said that the background is a patchiness in the global economy, with a surge in geopolitical factors. Within ZA, confidence has been shattered in the business sector, with the side-lining of the business role in economic revival.

Since 2012/13, the emerging economies began to falter. There is a structural divergence between the two blocs – with developed countries pulling ahead. Since 2008, there was a collapse in SA, the knock-on effect of the recession in the OECD, particularly the US. But we did not bounce back. More recently, from 2011 onwards structurally the economy is getting to a performance mode that is deviating downwards from its trend line.

In Q2 the platinum strike was a major blow to the economy. The likelihood of a further downgrade is real. The chances are the next move will be down, not up. Unless the national treasury comes up with a credible macroeconomic and fiscal strategy, the country will experience another downgrade.

In the last quarter, we had a further quarter of job losses. The currency did not help. We have had a momentum for depreciation. This has some mixed blessings for the sector. This leads ultimately to price increases, and affects inflation. Most manufacturers have reported increases in input costs, and there have been raw material shortages as well as water and electricity disruptions.

On the positive side, demand for exports from Africa and the US is more robust, although the local market remains the mainstay of our manufacturing performance.

Our comparative position compared to other trading partners has deteriorated.

Automation in manufacturing remains the top strategic concern, with machines replacing less-skilled labour. Skills availability remains an issue.

In terms of the hoped for increase in procurement by government, 82% of manufacturers say they are not benefiting from it! And policy makers need to see why this is so and how the blockages can be unlocked.

To conclude: there is a downbeat feeling in the manufacturing sector.

What of the NDP? It’s a structural developmental plan. The impact is in 10 years and beyond. One element nobody talks about is the professionalisation of the public sector, as an example.

That process itself is a five year process, and bears fruit in another 3-5 years.

On energy policy or education, it will also take time.

There is confusion at government level, with the NDP branded as the solution, but there is very little faithful adherence to its spirit and it has become a deterrent to the reality that the economy requires a short-term economic solution.

Conclusion:

Manufacturers are worried. And if the latest survey is to believed, there is not a lot of joy on the horizon.

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