At the start of 2020 the South African economic outlook seems dire. According to economist Prof Danie Meyer, director of the TRADE research focus area at the North-West University (NWU), the International Monetary Fund (IMF) estimates that economic growth will be set at below 1% for the year.
Prof Meyer, together with Roan Neethling, an NWU doctoral student, ascribes the low predicted growth figure to factors such as continued electricity supply problems, structural challenges, declining public funds and increasingly high external debt.
Other economic indicators
When looking at prominent economic indicators such as the purchasing managers’ index (PMI), the producer price index (PPI), and the consumer price index (CPI), all possible indications are pointing towards short-term changes in the economy. The PMI is a leading indicator of conditions in the manufacturing sector, which is measured by the PPI, while PPI is a good leading indicator for changes in inflation, which is measured as CPI.
• PMI
The latest PMI results, as released on 3 February 2020 by the Bureau for Economic Research (BER), indicate that at an estimated 45,2, January’s PMI is much lower than that of the previous year (50,3). Meyer explains that a PMI above 50 indicates expanding activity in the manufacturing sector, while a value below 50 indicates declining activity. He explains that this low and seemingly declining index is indicative of the negative sentiment in the manufacturing sector, which is heavily affected by the continued power supply shortage.
• PPI
The latest PPI number, which was released on 30 January, indicated an increase from 2,3% in November 2019 to 3,4% in December 2019.
• CPI
The significant increase in the cost to produce manufactured goods indicates an increase in production costs and subsequent increases in the price of products in the manufacturing sector. Despite the fact that the 2019 inflation rate was declining to below the midpoint of 4,5% of the South African Reserve Bank’s (SARB’s) target band of 3% to 6%, inflation increased from 3,6% in November 2019 to 4,0% in December 2019. Based on the latest PPI and CPI data releases, it is expected that inflation will increase again in January to between 4,2% and 4,4%.
Recession inflation
According to Prof Meyer and Roan, the indicators point towards the country currently facing the phenomenon of cost-push inflation, which occurs when the prices of goods and services increase mainly because of an increase in the cost of production. The risk of further load shedding, structural problems, lack of economic policy, failing state-owned enterprises (SOEs) and the lack of public funds creates an extremely difficult environment for both the business sector and consumers. The rising inflation, combined with high and increasing unemployment rates, indicates that South Africa may also be heading to a state of stagflation – also known as recession-inflation – which is caused by rising production costs leading to an increase in the prices of goods and services, accompanied by low economic growth and poor implementation of policies.
For more information, contact Prof Danie Meyer at 018 285 2656 or danie.meyer@nwu.ac.za.
