The Economy – Worse Than You Think

Our economy barely grew in the first quarter of 2008. 2.1% real seasonally adjusted growth is shockingly low given the previous quarter’s 5.3% growth. One needs to stretch back to 2001 to find a lower point of economic growth.

Mining down 22%

A large part of the problem is the 22% decrease in the economic contribution from mining. Yes, the power shortages have had a major impact on the mining sector. The worst appears to be over (holding thumbs but not holding breath) for our electricity shortages, but we still face several years of capped growth due to power constraints. Not ideal given the high current commodity prices and the extent to which our economy should be benefitting from this party while it lasts.

Inflation still to peak

Inflation is heading upwards. Food and fuel prices are a significant portion of this, but there are broader inflationary forces at play too. If I recall correctly, CPIX excluding food and fuel is still around 5.3% at the most recent measurement. Mr Mboweni of our reserve bank also considers extension in the money supply. The growth in some areas is still too high. Surprisingly so given overall consumer and busines confidence dips recently.

On the other side, banks and credit retailers are seeing their bad debts and impairment provisions increasing by up to 50% in some cases. The worst is not over yet. I feel particularly for Mr Price who were a late entrant into the credit retailing business – I don’t have any information on how their credit book has fared, but is a pity that they didn’t benefit much from the credit boom while they were still operating on a cash only basis. Now they will be hit by the downside.

So inflation is up, bad debts are up, confidence is down and the economy is slowing – not surprising a 2008 evaluation of our population growth rate as reported in the CIA’s famous and fascinating World Factbook is -0.5%. That’s right – our net population is shrinking. The influx of Zimbabweans may not be fully reflected in those figures yet, but recent disgusting xenophobic violence may slow that influx too. Hopefully Zim will get themselves right in time to accept their family and friends back.

Declining population

What is interesting about the declining population is that one could argue for an increase in the real GDP figure quote by 0.5% for understanding the effect on per capital GDP and overall living standards. If we have 0.5% fewer people to work, GDP should decrease by 0.5% (ceteris aribus). If we have 0.5% fewer people to feed, clothe, educate and cure of illness, then we need 0.5% less production to provide the same level of benefits. Many developing economies still have quite sharply increasing populations, which both necessitates and helps to create strong real GDP growth.

Per Capita GDP a better measure

Per Capital GDP is potentially a better measure of how an economy is performing in both absolute terms (relative to the past, but not compared to other countries) and in relative terms (relative to other countries in absolute terms and relative to other countries performance over time).
At the very least both figures should be considered together if we really are to understand the drivers of living standards and employment.

0.5% is cold comfort given the sharp drop-off in economic activity in the first quarter.

The future (or recent past)

2.1% growth for the first quarter of 2008 is part of the distant past. What we should be concerned about is the future. Or, in the case of delayed GDP figures, the immediate past. We are rapidly aproach to the end of the second quarter, and few would believe that the economy has fared better overall. An increase off the exceptionally low mining production could create a technical bump in GDP in the second quarter, but nothing to show any real improvement in the economy.

Let Trevor Manuel scorn anyone who think a recession is possible. Those of us who see it like it is will prepare for the storm while hoping it passes us by.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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