State of the economy at 50
By fstimes On 29 Jul, 2013 At 03:04 PM | Categorized As Business | With 0 Comments

THE economic upswing that started in mid-2009 is getting long in the teeth.

Next month will mark 50 months of upswing.

That is no longer a minor upswing but a respectable run.

Unfortunately, the pace of this upswing is nothing to write home about, reminding more of 1999-2003 at best (and 1983-1993 at worst).

The problem with stall speed is that you may only discover it too late, especially when already very low, as that Boeing did in San Francisco, losing its tail and turning into a burning hulk.

Same can happen to economies.

Sometimes things turn out lucky, as pilots intervene early enough and go around for another try.

The 2004-2007 episode was certainly one of those, except they then overdid the exuberance ahead of the soccer while the Western world lost the plot, an unhappy coincidence.

This time, there is no soccer-coated carrot and the world is at the very opposite of the commodity super-cycle spectrum it was in 2003-2004.

Then we got showered with largesse.

This time our commodity export prices are down, export volumes face a struggle while the capital access has become more discerning, an unhappy combination for a commodity producer with large current account deficits needing funding.

Even then our situation is not hopeless.

We have excellent foreign debt metrics, absolutely and relatively to EM peers.

The world remains accommodative.

If we had our act together we could maintain a respectable growth pace of three percent-four percent even under these still trying global conditions, as our domestic resource base is not yet stretched.

There remains a surplus of employable labour and physical capacity in the private sector.

So the cyclical upswing may be ageing but it remains young at heart, capable of much more.

But that is where we have to be realistic about ourselves.

Our infrastructure constraints have become severe, focused on electricity with its unchangingly severe output cap these past six years and Medupi and Kusile projects showcasing new building problems.

All this is restraining heavy industrial production and holding back fixed investment.

When elements in the building, materials and construction sectors want to call together an infrastructure Codesa as the large public infrastructure roll-out programme might otherwise be destined to fail, the technical wherewithal in the public sector is shown up as apparently inadequate to provide a needed growth push.

The one (electricity) holds us down, the other (much more new infrastructure roll-out) is still missing in action.

The real test may be certain labour elites imposing demands that strain our collective bargaining relations, job and output sustainability.

Mining, manufacturing (and agriculture) are in the firing line, but large parts of services (public sector, transport) are watching closely and can be mobilised.

In the private sector the choice is giving up jobs or accepting a devalued rand (euphemism for socialising the labour demands over the mass of society through an inflation tax, especially on the poor who cannot defend themselves).

In the public sector, there is not a choice (jobs would not be cut politically), only the invitation to either cut social delivery spending (also politically not a great vote spinner) or tax and borrow more (taking from the productive minority parts of society).

These are serious distribution issues.

You would think it would scare the victims into taking precautionary action.

Yet many of the poor do not seem to know that the wage demands being made could lead to a rand and inflation shock taxing them.

Even so, there is the suggestion of growing political fragmentation.

Economic Freedom Fighters for the downtrodden poor, the ANC/Cosatu alliance and Amcu for the workers, and the DA and Agang for all of us.

Many business managers seem to be uncertain enough about sales and growth prospects for them to keep new business expansion projects to a minimum (unless they are in Africa, China, India, EM Asia, Russia, Eastern Europe, Middle East, Australasia or Latin America).

The wealthy are defensive (naturally), the labour elites demanding (not unnaturally), the poor in uproar, the politicians preoccupied, the media feasting.

Yet investors are not quite despairing, with the JSE near record highs, and the rand (now sold off) well supported by bottom-fishing global institutions.

With some luck, it may keep the next disruptive shock at bay and all of us in a state of animated stall suspension as we hover above the runway, wanting to continue the cyclical upswing so clearly incomplete, but not quite giving throttle to the engines they need to make it so.

At two percent growth we are not in recession (though parts of the economy are operating well below potential) but we are far from fulfilling our potential.

That may continue while we allow distribution issues to powerfully dominate our daily discourse, wishing to debate the sharing of that which has not been produced yet.

 

● Cees Bruggemans is a consulting economist at FNB. You can follow him on Twitter @ceesbruggemans or e-mail him at cees@fnb.co.za

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