The headlines of the past two weeks were something to behold.
There was an outpouring of joy from all quarters at the employment (Quarterly Labour Force Survey) and then GDP data. The economy was going gangbusters and surging above pre-Covid levels and all was fine. Reforms were working, and why not?
Let’s extrapolate a positive narrative and some spin on investment implications. After all, the QLFS data showed a rise in formal employment of some 408,000 on the quarter, with unemployment surprising just below one percentage point on the better side. GDP, meanwhile, surprised consensus expectations strongly to the upside, printing at 1.9% quarter on quarter, seasonally adjusted.
This is all quite mad. There is so much going on to unpack.
We need to be careful because the path of reform affecting growth is long and complex, and to suddenly think it all came piling in during the first quarter could lead to complacency and misaligning expectations. That could lead to seeing the wrong risks into price pressures, and so the wrong monetary policy choices being made (though I don’t think the Reserve Bank will fall into this trap).
First, the economy in the first quarter was supported by household consumption growth being faster, not investment growth which is still only just above 14% of GDP. Most investment-related reforms, like spectrum and embedded generation, had not happened to see actual investment occur.
Second, trade volumes growth showed up the continuing logistics restraints preventing better export-led growth.
Most of all though, straight-line projection from the data ignores the drama to come in the second-quarter data from the floods and intensity of load-shedding then. In fact, mining and manufacturing data out last week were a substantial surprise to the downside for April as the floods and load-shedding hit, and showed, once again, that the economy cannot take part in the mining substitution story caused by the war in Ukraine. SA will be stuck with the price effects for now until we see the logistics reforms bear fruit. This is positive for tax revenue now, but not as much as it might otherwise be.
Growth will most likely fall back substantially then in the second quarter, and the impact might be felt for some time after.
The unemployment data is more problematic. The commentary simply ignored the huge data quality problems with the QLFS that particularly affected the previous two quarters and saw a marked underreporting of employment by about 1.3-million formal-sector workers for each quarter. So the first-quarter data saw just some correction in this issue, but was misinterpreted as amazing employment growth.
The “other” employment data released by Stats SA — the Quarterly Economic Survey — is far less volatile and has made much more sense through the Covid crisis. It is out in a few weeks and some commentators may then have egg on their faces. We expect it will show some improvement in the first quarter as the economy successfully navigated the summer season with an endemic stance on Covid, and so an actual tourism season to speak of. It just won’t be as good as the Quarterly Labour Force Survey data implied.
(As an aside, there is a silent crisis in data quality caused by underfunding of Stats SA that needs more attention.)
The global economy is also slowing markedly as interest-rate hikes and higher inflation erode household balance sheets and uncertainty curtails investment decisions. SA’s current account surplus of about 2% of GDP is a bright spot, which can help provide some more stable macroeconomic backdrop before reforms can fully kick in.
Serious, difficult and meaningful reforms are happening step by step. Indeed, I think many local economic agents aren’t aware of quite the scale or pipeline. Hence there is a degree of shock, for instance, at the larger Nersa embedded generation registrations of about 50MW-100MW now happening — with a handful set to be registered each month from now on and accelerating from there as grit blocking the pipeline is cleared.
However, it doesn’t make sense to overplay the narrative on reform now, only to suddenly throw everything out the window and question if any reform is happening at all with worse data in the coming months.
It is going to be a slow and difficult path to meaningfully reduce unemployment and to boost underlying potential growth when there is still likely two years of increasingly intense load-shedding left. That will show up in the volatility of data and it’s likely to seem the economy is never really firing on all cylinders yet.
Eyes must be on the prize, however, and what comes out on the other side with existing and new priority reform steps now under way. To be sure, it will test people’s patience as things remain volatile, not just the economics but increasingly the politics as well. But a path is certainly available. Let’s take it — together.