South Africa needs to stop looking to government spending as the catalyst for economic growth and should instead foster a more conducive environment for private sector investment in order to capitalise on its “demographic dividend”.
This is what Stanlib economist Kevin Lings told delegates at the Allan Gray Investment Summit on Thursday (19 July 2018).
Government has borrowed approximately R1 trillion over the last eight years, yet has not been able to dent a youth unemployment rate of 52.4%, which rises to 65.7% when one includes discouraged job seekers, he said.
Lings said the “scary thing” is that this borrowing figure excludes the debt of state owned entities (SOEs), which pushes government debt to approximately 70% of gross domestic product (GDP) when included to the central government borrowing figure.
By contrast, corporate South Africa is sitting on record cash deposits of about R810 billion, an amount that could help boost economic growth if it were reinvested in the economy.
“Government can’t lift growth by spending money because there simply is no more money,” said Lings.
“The biggest thing holding South Africa back is that the private sector is just not happy. Private spending is not engaging with this economy.”
Lings said South Africa needs to create 600,000 jobs a year if it wants to reduce unemployment, something that is particularly crucial given that the country has an average age of around 24 years.
Part of the problem, he added, is that private sector investment has languished far below the 20% of GDP yardstick targeted by the National Development Plan (NDP) and crucial to getting economic growth to 5% a year. In addition, fixed investment spending in manufacturing, a sector that is critical to jobs growth, has declined by a massive 33% since 2008.
“Business confidence for the last eight years has been below average,” said Lings. “The message for South Africa is that you want to be careful when you have an emerging population of young people that just don’t see a future for themselves.”
Sandy McGregor, portfolio manager at Allan Gray, said that South Africa foreign investment is a key component to get the economy going again.
“An internationally focussed business sector, promoting activities such as trade with Africa, agriculture and tourism, offers the most hopeful immediate opportunities,” said McGregor.
“The failure of our economy to gain any traction from the considerable improvement in business confidence following Cyril Ramaphosa’s election as president of the ANC and South Africa, speaks to the severity of the challenges the country faces.”
Lings said in the wake of Ramaphoria the majority of analysts lifted their economic growth forecasts to between 2.0% and 2.5% for the year, however the reality is that it is going to take a lot longer to rectify the structural imbalances in the economy.
Can South Africa learn from the US?
Lings said that the US economy has been able to re-ignite economic growth in the wake of the 2008 financial crisis, much to do with buoyant US business confidence, which has soared to an all-time high since Trump’s election victory. This has helped propel US employment to a record high of more than 10m jobs higher than its previous peak.
“The US economy has created 200,000 jobs a month since its previous low in 2010,” said Lings. “Right now the US is advertising for 6.8 million jobs. They’ve employed over 18 million people since the financial crisis ended yet they’re advertising for more.”
Nevertheless, Lings pointed out that the US has a key demographic weakness. The vast majority of the new jobs it has created are for people 55 and older with the fastest jobs growth for people 70 years and older.
The economist said this is why economic growth in the US has struggled to rise above 2.5% in recent years as older people tend to save rather than spend. This demographic handbrake is similar in other developed economies like Europe and Japan, which together with the US account for 49.5% of global GDP.
By contrast, India and Sub-Saharan Africa account for just 5.2% of world GDP despite accounting for approximately a third of the world’s population.
While the US alone accounts for 24% of the world economy and Europe a further 15.8%, additional economic growth in these two regions will struggle to increase without technological innovation.
This grants emerging economies like South Africa, India and other African countries with youthful populations an opportunity to capitalise on their demographics to spur economic growth, which Lings said will increasingly become a premium for investors faced with a growth constraints in an ageing industrialised world.
“Job creation is the most powerful economic factor that you can have in an economy,” said Lings. “Just give people a job and you can go forward from there.”