One area where there is broad agreement among the parties that have signed up for the government of national unity (GNU) is that South Africa needs much higher rates of economic growth.
But if and when the pace of economic growth really picks up some proper steam as the GNU dawn rises, what would that mean for inflation in South Africa?
It’s a question worth raising because for well over a decade now, South Africa has been saddled with an unenviable combination: pathetic rates of economic growth, sky-high unemployment, and relatively high rates of inflation.
At times, the economy has veered down the path of stagflation, which describes this combo of stagnation.
Read more in Daily Maverick: SA Reserve Bank is exorcising the spectre of stagflation
By any comparison, South Africa’s economic growth profile over the past 15 years has been a laggard on the global stage. (See chart). Advanced economies, emerging markets, the rest of sub-Saharan Africa, as well as the global average show South Africa has been dawdling along in the slow lane.
The economy contracted 0.1% in the first quarter of this year after growing just 0.3% in the fourth quarter of 2023, when a recession was narrowly averted. The economy is effectively barely growing at all and seems at times not just to be in the slow lane, but stalled in the emergency lane waiting for a boost.
This is a key reason why the unemployment rate is almost 33% and based on its broadest measure well over 40%.
But despite this massive constraint on demand pressures, inflation has — with some exceptions — remained stubbornly high.
During the period since 2009 of low growth, South Africa’s consumer price index — CPI — has averaged 5.0% or more in all but six calendar years, and will likely do so again this year.
This six years when it slowed to less than 6% includes 2020, when the economy sank under the crushing weight of Covid-19 lockdown restrictions.
Such rates of inflation just don’t add up against the backdrop of swelling levels of joblessness and an economy expanding at the pace of a three-legged turtle.
US contrast
The US economy offers a stark juxtaposition.
The US unemployment rate is near historic lows at 4%, CPI is running at 3.3%, and the current economic growth rate is 1.3%.
Inflation is well down from its recent peaks in the US, but the US Federal Reserve has an inflation target of 2.0%, which is why interest rates in the world’s largest economy remain elevated with no cut now seen before late this year.
But, you know, when your unemployment rate is close to historic lows, you can generally expect some inflation — a point generally lost in the US on the Maga cult of an economic illiterate named Donald Trump.
It’s the classic scenario which I recall from 40 years ago in Economics 101: most of the workforce has a steady income which means lots of stuff gets bought, while workers can be fussy about the jobs on offer, which in turn pushes wages and prices up.
This state of affairs hardly describes the South African economy, which points to underlying “structural” challenges — polite economics jargon for an unfolding Eff-Up.
Inflation in South Africa is hardly the consequence of fast growth and low unemployment. In fact, it’s stuck in a Twilight Zone where the gaping pot holes of state failure have simultaneously shredded the tyres of gross domestic product (GDP) growth while paving a fast lane for inflation.
It’s quite a feat to defy the basic laws of economic gravity.
There are many examples of this strewn along the Highway to Economic Hell.
Rand fluctuation
Take the steady decline in the value of the rand since 2009 — a key indicator of underlying economic confidence, or lack thereof. It has basically gone over this timeframe from around 10/$ to its current levels below 18/$ — with flirtations between which took it to close to 20/$ — effectively losing close to half of its value over the past 15 years. That’s according to an online currency depreciation/appreciation that I plugged the numbers into.
That alone has been a fuel — literally — for inflation because of the price of oil imports, which are denominated in greenbacks.
In 2009, the average per barrel price of the benchmark Brent Crude was $61.51, according to Statista. It is now around $84 a barrel with lots of peaks and troughs in between.
The bottom line is that it is now about 40% higher on average than it was in 2009, while the rand has lost a higher percentage of its value against the dollar, which has kept fuel inflation bubbling. And South Africa imports a lot more than just oil. The rand’s value has implications for food prices and much else.
Powerless
Then there is the inflationary impact of the chronic power shortages which have been in thankfully short supply since late March of this year, in part because of improvements at Eskom, but largely owing to the scramble for solar panel installation by business and households.
The South African Reserve Bank (Sarb) estimated last year that the rolling blackouts were adding 0.5 percentage points to inflation — a material level that partly reflected the costs of businesses burning diesel to keep their operations in, well, business.
Eskom has been charging more and more for its unreliable services even when it was being looted almost into the ground under disgraced former president Jacob Zuma.
Eskom tariff increases from 2007 to 2022 amounted to a staggering 653%, while South Africa’s consumer price index (CPI) over that period rose 129% according to data compiled by PowerOptimal.
CPI would have moved along at a much slower pace were it not for those “administered costs”. And the power crisis has also been regarded as the biggest hindrance to economic growth.
The pattern is becoming clear.
Minerals and logistics
Then there are the costs of doing business inflicted by Transnet’s woes and the logistics crisis this triggered, with the mining and other sectors of the economy opting for the more expensive but relatively reliable option of moving their product by truck instead of rail.
And while lifting costs, the Minerals Council South Africa has estimated that, between 2021 and 2023, South Africa lost out on R90-billion from coal and iron ore exports alone, which equates to 1.4 percentage points of GDP over three years.
Crime
Rampant crime has also triggered soaring costs. The World Bank estimated in a report last year that crime cost South Africa’s economy — by a “conservative estimate” — the equivalent of 10% of its slow-growing GDP every year.
There is a truly vicious cycle at work here. Crime constraints growth while dramatically raising the cost of doing business because of security measures and losses incurred from theft, thereby adding to inflation.
Read more in Daily Maverick: SA’s crime rate exacts a huge toll on the economy, says World Bank
So, how does the GNU in partnership with the private sector promote faster economic growth without opening the floodgates of inflation?
For one thing, raising the reliability of power supply while reducing its costs would help greatly. Addressing the logistics crisis will also go a long way to boosting growth while cutting price pressures. And the same goes for crime and corruption.
GNU dawn, same challenges
Resolving this trio of challenges will steer South Africa off the road to stagflation, while boosting confidence in and the value of the rand. And thankfully, there has at least been progress on the power and logistics fronts, not least because of government/business initiatives which should gain traction under the GNU.
It’s also worth noting that a low rate of inflation in turn can underpin economic growth. It lifts consumer and business confidence as incomes and revenue flows are not eroded and provides households and businesses with more capital to spend, save and invest.
The lower interest rates that coincide with a benign inflationary environment are a further boost to economic growth. This poses a difficult balancing act for central banks that need to craft a monetary policy environment that can support growth without stoking inflation.
On this score, the South African Reserve Bank (Sarb) has been a godsend, with its relentless pursuit of bringing inflation to the middle of its 3% to 6% target range. At 5.2%, we are not there yet and it may take awhile.
But firmly anchoring inflation and inflation expectations in that range or lower is a good space to be in if economic growth finally takes off. And under the GNU, the Sarb's independence also has a firm anchor.
Good investing!
Ed
DM
(Tim Cohen is on leave).