OAM: Populist party likely to take over unless SA addresses jobless rate

Support for the EFF is likely to wane ahead of the upcoming general elections as the VBS scandal erodes the party’s anti-corruption credentials, says Overberg Asset Management.

This is good news for the ANC and its more moderate economic manifesto.

According to OAM, however, it is only a matter of time before a populist party takes power in South Africa unless the economy can successfully address the unemployment problem.

"The jobless rate is the biggest risk to South Africa’s stability," said OAM. "It has one of the highest unemployment rates in the world, at 27.7%."

The analysts at OAM believe that state and union intervention has been successful in boosting wages for holders of 'decent' jobs but at the expense of rising joblessness.

"Decent jobs cannot be imposed, they depend on rising productivity, which in turn requires improved education and skills training." 

South Africa economic review

• Total new vehicle sales volumes declined sharply in November by 4.6% year-on-year, which the National Association of Automobile Manufacturers of South Africa (Naamsa) attributed to unscheduled work stoppages and industrial action at various plants. Despite the weak data, there were some encouraging signals. While total new commercial vehicle sales declined by 3.0%, the medium and heavy commercial vehicle segments increased by 17.5% and 4.7% on the year building on the prior month’s respective growth rates of 15.3% and 9.0%, respectively.

The trend suggests a pick-up in mining, construction and transport activity. Encouragingly, total new export sales grew by 2.5% on the year with solid order books indicating further growth over coming months. The passenger vehicle segment, which accounts for around 65% of total new vehicle sales, was the weak link in the overall data showing a decline of 5.4% on the year. Weak jobs growth, elevated fuel prices and the recent interest rate hike are likely to keep passenger vehicle sales under pressure over the medium-term.

• The ABSA/BER manufacturing purchasing managers’ index (PMI) makes for encouraging reading, rising sharply in November from 42.4 to 49.5, a whisker from the key 50 threshold which separates expansion from contraction. Among the sub-indices, the employment index was the only one to lose ground, from 44.2 to 43.5. By contrast, the business activity index gained from 40.3 to 49.2, the inventories index from 41.4 to 50.2 and the purchasing commitments index from 43.8 to 54.3.

The purchasing price index also moved in the right direction from 84.7 to 78.6, indicative of easing inflationary pressures helped by falling oil prices and the strengthening rand. Forward-looking indicators, including the new sales orders index and the index measuring expected business conditions in six months’ time, both strengthened, from 39.0 to 50.3 and from 41.7 to 48.6, suggesting improving buoyancy in the manufacturing sector in 2019.

• Producer price inflation (PPI) accelerated in October from 6.2% year-on-year to 6.9% well above the 6.3% consensus forecast. The chief culprit was the higher oil price causing petrol and diesel inflation to increase from 18.8% to 24.1% and from 22.8% to 28.9%, respectively. Excluding petroleum products, PPI inflation remained well anchored, rising only slightly from 4.1% to 4.2%. Besides petroleum products, other PPI categories showed a moderating trend in line with weak domestic demand.

Textile, clothing and footwear inflation fell from 2.8% to 2.7%, while metals, machinery and computing equipment inflation eased from 4.7% to 4.6%. Despite the spike in October’s headline PPI reading, the outlook remains benign.

Since its peak two months ago the oil price has dropped from $85 per barrel to $62, a 27% decline, while the rand has strengthened versus the US dollar by around 11% over the same period, signalling a sharp easing in imported fuel price inflation over coming months. The expected moderation in PPI should ease pressure on the South African Reserve bank to push through additional interest rate increases.

• As expected the FNB/BER consumer confidence index (CCI) fell from its elevated level of +22 in the second quarter (Q2) to +7 in Q3, although it remains well above its long-term average of +2, calculated since 1994. Despite sharp falls in confidence readings, consumers remain optimistic about the business cycle and optimistic that household finances will improve over the next 12 months.

The volatility in consumer confidence is attributed to tightening financial conditions, political uncertainty and social instability. These latter factors are likely to affect consumer confidence in the run-up to the national elections next year, after which confidence should start to stabilise amid reduced political and policy uncertainty.

• The RMB/BER business confidence index (BCI) unexpectedly deteriorated in the third quarter (Q3) from 34 to 31, falling further below the neutral 50-level. Some recovery had been expected following the decline from 40 to 34 in Q2, helped by President Ramaphosa’s Jobs Summit and Investment Conference. However, any benefits stemming from these initiatives were outweighed by lingering concerns over land reform, social unrest and strike action.

The BCI, at its current level of 31, indicates that around 70% of respondents are unhappy with current business conditions. Business confidence traditionally leads the investment cycle by around nine months, which indicates little chance of a pick-up in fixed capital formation until at least the second half of 2019.  

• The trade balance posted a deficit of R5.6bn in October adding to the deficit of R3.8bn recorded in September. The month of October tends to mark a spike in import demand as inventories are restocked ahead of the festive season. Exports increased by a solid 8.5% month-on-month although this was outdone by a 9.7% surge in imports.

Encouragingly, imports of vehicles, transport equipment, machinery and equipment all increased, perhaps indicating renewed investment spending. For the year-to-date, exports have increased by 6.6% compared with the same period last year while imports have gained by 13.3%, resulting in a year-to-date trade deficit of R8.8bn compared with a trade surplus of R49bn in the same period last year.

While a sharply weaker oil price should reduce pressure on imports over coming months, uncertainty over global trade stemming from US/China protectionism, may hurt export demand.

• Growth in private sector credit extension (PSCE) moderated in October from 6.3% year-on-year to 5.8%, brought down by a reduction in corporate credit demand. Corporate credit extension fell by 1.9% month-on-month pulling down the annual growth rate from 5.4% to 3.9%. Household credit growth improved slightly from 5.1% on the year to 5.2%, with credit rising by 0.6% on the month.

However, “other loans and advances”, which includes unsecured loans, fell by 2.1% on the month with year-on-year growth slowing from 5.7% to 4.3%. Overall credit growth, although checked by the South African Reserve Bank’s recent interest rate hike, should recover following next year’s national election amid an expected recovery in business and consumer confidence.

The week ahead

• Third quarter GDP: The SA economy has officially exited the recession after reporting 2.2% GDP growth for the third quarter of the year, Stats SA announced on Tuesday morning at a briefing in Pretoria. 

SA slipped into a technical recession during the first half of the year following two consecutive quarters of negative growth, denting initial positive market sentiment after the election of Cyril Ramaphosa as president. 

The 2.2% rebound was in line with the expectations of economists surveyed by Fin24, who projected positive growth of between 0.8% to 2.5%.

• Balance of payments: Due on Thursday 6th December. The current account, included in the balance of payments, is expected to have deteriorated slightly in the third quarter (Q3) to 3.4% of GDP compared with 3.3% in Q2, attributed to a decline in the size of the trade surplus.

• South African Chamber of Commerce and Industry (Sacci) business confidence index: Due on Thursday 6th December.

The Sacci business confidence index, which gained for two consecutive months in September and October, coinciding with the appointment of Tito Mboweni as finance minister, and President Ramaphosa’s Jobs Summit and Investment Conference, is expected to have maintained positive momentum in November. The SACCI index gained in October from 93.3 to 95.8.

Bottom line

• Support for the EFF is likely to wane ahead of the upcoming general elections as the VBS scandal erodes the party’s anti-corruption credentials. This is good news for the ANC and its more moderate economic manifesto. However, it is only a matter of time before a populist party takes power in South Africa unless the economy can successfully address the unemployment problem.

The jobless rate is the biggest risk to South Africa’s stability. It has one of the highest unemployment rates in the world, at 27.7%. Amongst the youth, aged 15 to 24, the unemployment rate is 52.8%, a massive threat to the social fabric of the country.

• President Ramaphosa has addressed the unemployment issue through recent initiatives including the Jobs Summit and Investment Conference. Investment spending will create jobs. However, full employment will not be achieved until labour laws are amended. The root of the problem, as identified by the credit rating agencies lies with South Africa’s labour law rigidities.  

• South Africa’s employment-GDP elasticity, which measures the relationship between the change in GDP and the change in employment, has maintained a steady downtrend. Research shows that the biggest culprits are mechanisation and rising unit labour costs. Fifty years ago, the employment-GDP elasticity was 1.2%, which meant that a 1% change in GDP resulted in employment growth of 1.2%. Employment-GDP elasticity now stands at just 0.5%.

• Labour costs have risen progressively since 1994 due to burdensome labour laws and trade union regulations. In the ensuing years, there has been a continuous rise in employment costs as a percentage of total private sector output, diminishing the incentive to hire.

• Proof that labour laws and trade union restrictions are bad for jobs growth is evident in the Quarterly Labour Force Statistics. In the third quarter, informal sector jobs increased by a massive 6.7% on the quarter and 12.2% on the year. By contrast, informal sector jobs fell 0.6% on the quarter and 1.1% on the year. The informal sector does not suffer the same burden of trade union regulations and rigid labour laws.

• State and union intervention has been successful in boosting wages for holders of “decent” jobs but at the expense of rising joblessness. Decent jobs cannot be imposed, they depend on rising productivity, which in turn requires improved education and skills training. 

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* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.

Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable, but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.  

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