ECONOMY

Economic insight

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Economic times are tough in South Africa. With the third quarter showing a slow decline, economists have feared that another recession might be on hand. To make matters worse, rumors have been circulating that a possible downgrade in credit rating might be on the cards.

While South Africa is experiencing a number of challenges such as labour unrest, shortages in power supply, and a drought of considerable magnitude, which will eventually impact the bottom line, all is not lost. According to the latest figures, South Africa has indeed narrowly escaped a recession as third quarter statistics reveal a small (0.7%) increase, says Mike Schüssler, Chief Economist at economists.co.za, responsible for compiling the BankservAfrica Economic Transaction Index among others.

We tracked Schüssler down for the inside scoop on the current economic climate and to find out what we can do to remedy it, moving into 2016.

When asked what the impact on South African business would be, should we face another recession, Schüssler says, “We know that the economy has seen its profit margins decline substantially and along with a shrinking economy---it is very likely that less investment into new ventures will be forth coming. This is not good for employment and that is a great concern, as our unemployment rate remains one of the highest in the world for nearly two decades now."

Schüssler does however highlight that the current economic performance is not merely an isolated symptom of the South African economy. Looking at the global economic climate, he says very weak commodity prices due to China’s growth, which has been slowing and slipping along with no real pick-up elsewhere, has indeed affected economies worldwide.

According to Schüssler, “We have never seen these falls in our working lifetime.” He says the last big falls were in the 1980s, but the fall in iron ore, coal and oil is now bigger than that of the 80s and compares to the 1919 and 1931 falls.

Consumer confidence has been noted to be one area of concern which is negatively impacting the economy. So what are the main factors affecting consumer confidence at the moment and how can this be dealt with? As Schüssler explains, the consumer will always worry about jobs in this environment, but he also believes that they have had it better than all the major role players for some time.

“We may need to get used to two or three years of low growth in income (below inflation) before things can get better. Firstly, state employees are costing the economy too much for the services delivered and secondly, the private sector, such as companies in the mining sector, can no longer compete (no fault of their own). Keeping rates lowish can help on the margins but not overall and that is the concern.  We need better economic management and a government that delivers more than houses, but also quality healthcare, education, roads, dams and sufficient electricity,” he says.

Looking at labour unrest during the 2015 period, Schüssler says it has been relatively little compared to previous years, but if we have had more unrest, we would no doubt be in negative territory. Two important role-players, the public and private sectors, do however need to step up their game to achieve increased economic growth.

Sharing some advice on what Government can do to remedy the situation, Schüssler says firstly, they need to relax rules and find ways to reduce risk. He says it is time to stop making decisions such as in the case of the recent visa debacle and focus on industries that can make a difference in rural areas in industries such as agriculture, tourism and food production.

“Make sure that risks in all sectors of the economy are reduced. Lead from the front by telling people the hard reality; that we need to make a living first and then we can argue minimum wages. Profits are not the enemy, but part of the solution to creating jobs. Some things, such as the drought and low commodity prices, we will need to ride out as a country, but others, including ultra long strike action, must be curtailed. Any strike that goes say over three weeks must go to arbitration. The Public Sector Wage Bill must drop from about 14% of GDP to about 9%,” he told BBQ.

But Government is not alone in this endeavor. When asked about the role that private sector can, and should, play in growing the economy, Schüssler says the private sector should be creating jobs and that South Africa should be “exporting its way out of trouble”. However, he says there is currently too little incentive and too much uncertainty. According to him, the private sector should be creating profits and jobs now wile the rand is weak.

“We must allow that to happen---and we must reduce rules and risks. Rather allow for government-funded and private sector loans to black business so that they can make real market decisions when buying into or, better still, creating companies. That loan can be a long-term one of say five to ten years. The person would for instance need to have proof of say two years of entrepreneurship. BEE  makes for temporary partners who want dividends not a new business which could create jobs,” he says.

Schüssler does however mention that our attitude to entrepreneurship is very important. He says if people fail at business, we should still clap hands, as they have tried. This will encourage them to try again and to succeed at some point. “That will create more jobs than we think,” he says. So what is his predictions for the upcoming year? “Growth of 1% per year, an inflation rate of 6% and an unemployment rate of 26%,” he says.

Concluding with some final remarks to our readers, Schüssler says, “The hard times ahead will be tough, but they too shall pass and we need to start thinking how we get going again in 2018 or 2019. We also need to understand that this is the time to work hard and not the time to demand. Government got some things right, but needs to understand that the market, and not government, should play the leading role in the economy. Both role-players are important and Government should focus on education, courts, policing and health, while the private sector should look for opportunities, growth and profits. That would be the right combination.”

 

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