National income accounts show challenges and response

The national income accounts – updated to 2013 – indicate the challenges facing the economy and helpful responses being made by some of the important players.

The better, if not exactly comforting, news from the Reserve Bank’s March Quarterly Bulletin, about the economy in 2013, is that export revenues (in current rands) picked up and are growing a little faster than imports, having lagged well behind imports in recent years.

This difference between imports and exports in the fourth quarter of last year added significantly to gross domestic product (GDP), which was 3.8 percent larger than a year earlier. Dragging down expenditure and GDP growth in the fourth quarter was an extraordinary run down in inventories that were estimated to have declined by as much as R22.3 billion in constant prices. The improved trade balance added 7.8 percent to the quarter’s growth, while the decline in inventories reduced growth by 5.2 percent.

The decreased level of inventories, with high import content, would have helped improve the balance of trade. But the reduced demand for goods held on shelves and in warehouses may well reflect less confidence by the business sector in the growth outlook.

Such a lack of confidence would also reveal itself in an increase in dividends paid out to shareholders of local companies, including to the increased proportion of foreign owners on their share registers.

Dividends paid to foreign shareholders went up sharply last year while dividends received by South African shareholders in offshore companies declined as sharply, adding to the current account deficit.

The current account deficit, seasonally adjusted, declined sharply from an annual rate of R215.8bn in the third quarter to R178.9bn in the fourth quarter, while the trade deficit declined from an annual rate of R114bn to R62.6bn. The estimated actual current account deficit in the fourth quarter was R36bn, down from R61bn in the third quarter.

Slow growth may mean a surplus on trade and a smaller current account deficit and thus less dependence on foreign capital. Such trends should not be regarded as good economic news, although perhaps it is welcome to foreign investors concerned about the economy’s dependence on foreign capital, given that foreign capital has become more risk averse in recent months.

There is a virtuous economic circle for the economy. Demonstrate faster growth, promise higher returns to investors, and capital from both domestic and foreign sources will be made readily available to any business enterprise.

The faster the growth rate, the better the case businesses have to add to the productive stock of real capital, plant and equipment, to hire more workers and managers and to help the workforce to become more skilled and efficient and so capable of earning more. Growth leads and capital follows.

The major challenge faced by the economy is that the growth rates have slowed down recently, mostly for reasons of our own making. The country has a structural growth problem, not a structural balance of payments problem. Grow faster and the balance of payments will sort itself out.

But the growth issues facing the economy have been exacerbated because foreign capital has become more expensive since May last year for reasons beyond the country’s influence. This has led to a weaker exchange rate and upward pressure on prices further depressing already slow growth in real consumption spending.

These price trends raise the danger that interest rates will be set higher, again further depressing domestic spending and reducing prospective growth rates and the business case for adding to capacity.

These expectations of weaker growth discourage capital inflows and may lead to a weaker rand, which is anything but a virtuous economic circle.

The scope for an economic revival, led by households, is limited, given the recessionary state of the formal labour market and so limits to growth in household credit.

It would seem realistic to predict that faster growth over the next few years could only be led by a surge in exports. A stronger global economy and higher prices for the metals and minerals we produce and export is necessary for an export-led recovery. Continuous production by mines and factories is necessary to achieve this.

These were not possible in 2012 and 2013, given the pervasive strikes that reduced output from mines and factories.

Hopefully, the business sector will “come to the party” as the finance minister invited it to do in his Budget speech. In this regard, the good news suggested by the updated national income accounts is that the business sector (represented by the national income account for non-financial corporations) have dressed up their performance. Corporations increased their capital expenditures in 2013 and proved willing to fund their larger capital budgets by raising additional debt finance on a significant scale, despite deteriorating cash flows, represented in the chart by gross corporate savings.

But the same statistics indicate one of the structural weaknesses of the economy – a low domestic savings rate compared with a higher rate of capital formation. Hence a funding gap that can only be overcome by use of foreign savings.

Almost all the savings made are by the corporate sector in the form of retained cash. The government and household sector contribute little to the savings pool.

In the absence of any higher propensity to save, the path forward remains as it has been. Grow faster to attract savings from global capital markets and do what it takes to encourage business to grow faster so that they can attract more capital from abroad.