Fanie Brink, Independent Agricultural Economist
"The economic growth rate announced by Statistics SA for the first quarter of 2021 today is 4,5%. It is, however, very unfortunate that Statistics SA continued to determine the quarterly economic growth for the first quarter with its incorrect calculation method," says Fanie Brink, an independent agricultural economist.
He says the correct real growth rate for the first quarter of this year was in fact -2.7% which gives a correct indication of how much the economy has grown over the past year. It is, therefore, already an annual rate that does not need to be annualised because it was compared with the same quarter in 2020! This will be exactly the growth rate that will be taken into account when calculating the growth rate for 2021.
Although Statistics SA decided at the end of last year to no longer convert the quarterly growth figures to annual growth rates (to annualize by simply multiplying the quarterly growth rate by 4), it did not proceed to implement the adjustment. The calculation method is in fact even further wrong because it still compares consecutive quarters with each other, such as the first quarter of this year with the last quarter last year, and not with the first quarter of 2020.
The conclusion that must now be drawn is that the growth rate of 4,5% for the first quarter is totally wrong, while Statistics SA still expects everyone to continue to use this figure. The calculation of the quarterly and annual growth rates is calculated on different methods and the projected quarterly growth rates may, therefore, not be an accurate indication of the expected annual growth rate!
The seasonal adjustment of the quarterly figures to further overcome this inaccurate calculation method is also wrong because it cannot make a complete and correct adjustment if the different quarters are not compared with the same quarters (more or less the same season) of the previous year.
The comparison of a quarter with the previous quarter is an indication of absolutely nothing! The question must also be asked why the seasonal adjustments are made because the influence of the climate changes between seasons on the economy must be pointed out.
The annualized quarterly growth rate may be even less an indication of the expected annual growth rate if it were to be sustained over the following quarters and it is, therefore, in fact useless and misleading because it is based on a totally wrong assumption.
Almost all agricultural enterprises are seasonal bounded which makes the comparison of successive quarters unrealistic due to the high quarterly climate volatility which can also even have a significant impact on some of the other industries in the economy.
By comparing a specific quarter with the same quarter of the previous year the quarterly growth figures will in any case be annualized, while the problem with the seasonality of the different quarters can also be solved. The comparison of consecutive quarters in the same year is statistically and economically irrelevant because it does not reflect the correct seasonal growth figures.
Statistics SA indicated last year that there are four methods to calculate the quarterly economic growth rate but this will be very confusing and misleading and therefore only the correct calculation method will be acceptable.
Growth rate for the first quarter
The economic growth for the first quarter of this year is calculated by Statistics SA from the supply and demand side of the economy on the basis of an "internationally recognized and accepted method." The real changes (after the effect of inflation has been eliminated) in the Gross Domestic Product (GDP)1) for the first quarter of 2021 compared to the fourth quarter of last year, are shown in the quarterly publication (P0441)2) of Statistics SA which was released today.
Supply side
The real quarterly economic growth rate as measured by the changes in the real Gross Domestic Product (GDP) on the supply side of the economy since 2015 is shown in the following graph:
Growth rate 2020: 2nd quarter = -51,7% 3rd quarter = +67,3% Source: Statistics SA
The real quarterly economic growth rate for the first quarter of 2021 created on the supply side of the economy increased at an annual rate of 4,6% and amounted to R3,04 trillion at constant 2010 prices.
The growth rates on the supply side are determined by the gross production values of all the individual industries in the primary, secondary and tertiary sectors of the economy. The growth rates and the contribution of the industries to economic growth can only be increased if the profitability of the industries can be improved. The profitability of the industries is firstly, determined by the changes in the prices of all the inputs used by each industry versus the changes in the prices of all the outputs that each industry produces, manufactures or delivers as personal services such as legal, medical, financial and insurance services.
Secondly, by the efficiency with which the inputs can be converted into outputs which can be improved by the applications of the latest technological developments. It should enable producers, manufacturers and service providers to produce more output with the same quantity inputs or the same quantity of outputs with fewer inputs.
Demand side
The real quarterly economic growth rate as measured by the changes in real gross domestic expenditure (GDE) on the demand side of the economy is shown in the following graph:
Growth rate 2020: 2nd quarter = -52,4% 3rd quarter = +68,1% Source: Statistics SA
The real GDE for the first quarter in 2021 created on the demand side of the economy increased at an annual rate of 4,5% and amounted to R3,04 trillion.
Economic growth on the demand side of the economy is created by the changes in the contributions through private consumption expenditure of households and the government (as a consumer), gross capital formation through capital invested in real estate, machinery and other assets, as well as imports and exports (net exports) of products and services, together with the changes in inventories that are also taken into account.
The growth rates and the contribution of private consumption expenditure and gross capital formation can only be increased if the salaries and wages of consumers can be improved, unemployment and personal taxes can be reduced to increase the disposable income of consumers.
Supply and demand
It is important to note that economic growth is not only created by all the industries on the supply side of the economy, but also by private consumption spending, capital formation and net exports on the demand side, otherwise growth is not possible. The demand side of the economy is consequently just as important as the supply side in the process of creating economic growth that is driven by the profit motive.
The results of these two calculations of the total supply (R3,04 trillion) and demand (R3,04 trillion) figures of the economy for the first quarter of this year are normally of the same magnitude, although small deviations occur. This means, in effect, that everything that is produced and imported minus what is exported is consumed locally and that supply and demand in the economy are equal.
This conclusion is based on one of the most basic economic principles that price levels (inflation rate) are determined by supply and demand (excluding regulated prices) in the economy and that prices play a very important role in the economy to always bring the supply and demand back to a market equilibrium.
Creating economic growth
The foregoing information proves very clearly that economic growth is created from the supply and demand sides of the economy that is driven by the profit motive. If this were not true and correct, the economy would not exist. It is, therefore, the biggest single delusion in economic science that economic growth is stimulated and created by lowering the Reserve Bank's interest rate.
If the government wants to create higher and sustainable economic growth, it will require a complete restoration of the capitalist economic system that created much prosperity and progress for the country before 1994.
The most basic difference between capitalism and socialism is the fact that capitalism can generate profits, growth and revenue for the government that can address the serious social problems in the country, while socialism can only generate losses, no growth, expenditure and debt.
It will, therefore, be extremely important for the government to return to a mixed capitalist and socialist economic system as it existed after 1994, before the capitalist system was totally rejected by the government and economic growth destroyed, in order to realise the good qualities of both to the systems and to eliminate its weak features as far as possible.
The government's socialist ideology will destroy the economy and the country within the next 3 to 4 years. The final countdown to the total destruction has already begun and is already irreversible under the current policy of the government.
1) The real GDP and BBB are the actual nominal figures calculated at constant prices to determine by how much it has grown without price increases taking place.
2) The quarterly publication of Statistics SA can be downloaded at the following link:
http://www.statssa.gov.za/.../P0441/P04411stQuarter2021.pdf
"Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its only inherent virtue is the equal sharing of misery.”
Winston Churchill, former premier of Britain
If socialists understood economics they would not be socialists.”
Friedrich Von Hayek, Austrian-British economist and philosopher
“Without profit there can be no business; no employees; no incomes earned; thus, no economy. It is in the interests of everybody who is part of a business enterprise to recognise that the goal of the entire team is to progressively and vigorously be involved in the pursuit of profits.”
Temba A Nolutshunga, Director, Free Market Foundation
"In every single country where capitalism has been tried, free markets have been expanded, we have seen a mash growth in wealth and an elevation in the quality and standard of human life. We do not see it in other systems. On the reverse side we have seen every single time that where socialism was attempted it has led to destitution, devaluation and even death. It is a system that has failed every time it has been tried."
Hannah Cox, Foundation for Economic Education in the USA.
