“The economic growth prospects for this year of 5% and higher, which are cited by different commentators for various optimistic reasons,1)2) are not realistic,” says Fanie Brink, an independent agricultural economist.
The first important reason is because of the fact that various financial asset managers and economists compare the growth rate for the second quarter with the first quarter of this year, which according to Statistics SA was 1,2%. They then continue to annualise the quarterly growth rate to an annual rate of 4,8% because they assume that the remaining two quarters of this year will have the same outcome as the second quarter which is incorrect and unrealistic. The “annual rate” calculated in this way is by no means an indication of what the expected growth rate for 2021 can be.
Statistics SA decided for the first time this quarter not to annualise the quarterly growth rates and to also calculate the growth rates by comparing it with the same quarter of the previous year which is the correct calculation method because the growth rate is then an annual rate and does not need to be annualised.
The actual growth rate, according to Statistics SA, for the second quarter of this year compared to the same quarter last year was in fact 19,3% which was significantly higher than might have been generally expected. The reason for this is that the second quarter last year was hit hardest by the Covid19 pandemic and the restraining measures in the country that resulted in the weakest quarterly growth rate of -17,4% since 1960.
The second unrealistic reason for the expected higher growth rate this year is the fact that the third quarter last year again resulted in the highest quarterly growth rate of 13,9% since 1960. It means that the third quarter this year can again achieve a particularly low growth rate than might be expected at this stage. The growth rate itself could be negative, especially as a result of the riots in KwaZulu-Natal and Gauteng in July and will not achieve an average growth rate of 5% for this year. The economy will have to grow by more than 11% to achieve a 5% growth rate for this year after the contraction of 6,4% last year!
The third reason why the growth prospects for this year are not realistic is because of the higher international metal prices that increase government's revenue will also be accompanied by increases in government expenditure. The government will inevitably have to use this windfall to reduce rising poverty, hunger and unemployment to try to deal with an outbreak of any further riots as far as possible. As a result, the gap between government revenue and expenditure will widen in this financial year and therefore the government's further weakening fiscal position will not contribute to higher economic growth.
The government will not put the additional company tax it received from the mining industry into a savings account but will also spend it as the ANC government has never had money that it did not spend and wasted.
The higher international metal prices and consequent increase in the profitability of the mining industry are in fact a very clear proof of how the industry can make a greater contribution to economic growth and generate greater revenue for the government to address the very serious fiscal and social problems in the country.
As a result, there is no chance that the budget deficit for this year will only be 7% of the gross domestic product (GDP) compared to the 9,3% budgeted for in February. The chances are much better that the budget deficit will be even higher than what was budgeted for!
The possibility that the government's debt burden in relation to the GDP may be closer to 70% than the 88% previously provided for can be totally ruled out in the light of the additional expenditure for which the government must find the funds. In all likelihood, the 11% upward revision of the size of the economy made by Statistics SA this year will not even make a significant contribution to improving the government's debt burden relative to the GDP.
Therefore, the assumptions made by various asset managers and economists that the government's budget deficit and its debt burden to GDP will be reduced are by no means realistic. Rather, there is a strong possibility that the government will have to use the greater revenue for its expenditure for which no other funds are available.
"The new Minister of Finance and Head of Economic Transformation, Enoch Godongwana, said last week during a party lekgotla that the extremely difficult financial reprioritisations and policy considerations must be agreed upon by everyone in the government if the government wants to meet its existing spending commitments, wants to stabilise the fiscus and avert a full-scale financial crisis. He painted a very bleak picture of the pressure on public finances that would require a tighter belt and an increase in efforts to grow the economy.
Is the government's financial crisis intensifies, the government will not be able to afford a basic income allowance and as a result jobs in the public service may have to be reduced to find R19,6 billion in outstanding wage increases.
The government must also urgently get R73,4 billion to meet its salary undertaking with the public sector and to avoid the further collapse of important state-owned enterprises, but there is also great uncertainty about where the funds will come from.”3)
The poor economic growth prospects for the country were in fact also confirmed by the new Minister only a week after he was appointed when he informed the investment community that “nothing is really going to change in terms of South Africa's fiscal position and commitment to debt stabilisation. ” He also maintained his commitment to fiscal discipline and the structural reforms needed to promote growth in line with the views of his predecessor, Tito Mboweni.
"This confirmation and commitment of the Minister will, in fact, means that he will finally drive the current extremely weak economic and fiscal position of the country over the abyss!"
The latest economic growth figures show that the private and public sector's combined fixed capital investment has declined further, while the Johannesburg Stock Exchange has warned that the rate at which foreign investors are withdrawing their capital from the country has gradually increased over the past few years because of the economic environment which has deteriorated significantly.
The assumption by asset managers that the "downward trend in the economy in the five years to 2019 is over now" and that the "talks of stagnation in the economy can now come to an end" is even more unrealistic. The country is not experiencing a stagnant economic cycle, but an economy that has already been almost completely destroyed by the socialist ideology of the ANC government!
Magnus Heystek, a director and investment strategist at Brenthurst Wealth, recently pointed out that "optimism is not an investment strategy," especially when relying on unrealistic and catastrophic economic prospects.
It can, therefore, not be recommended that foreign and local investors make further capital investments in South Africa," said Brink.
Fanie Brink -Independent Agricultural Economist
1) “Kyk, hier is goeie nuus, sê ekonomie”
https://www.netwerk24.com/Sake/Ekonomie/kyk-hier-is-goeie-nuus-se-ekonome-20210912
2) “Vlak 2 ‘kan ekonomie met 5% laat groei’
https://www.netwerk24.com/Sake/Ekonomie/vlak-2-kan-ekonomie-met-5-laat-groei-20210912
3) “ANC told 'there's no money' for its expensive big plans”
ANC told 'there's no money' for its expensive big plans (timeslive.co.za)
