Reserve Bank Economic Report: 2011 could be the year of stagnation
The Reserve Bank today released its annual economic report for 2011, with the economic data from 2010 and the first three months of 2011 summarised in it. The annual economic report provides a comprehensive overview of the economy and provides important insights into the economy's performance over the year ended March 2011 as well as the year to come.
This report, read in conjunction with STATS SA's Quarterly Labour Force Survey for the second quarter of 2011, and the UN's recent report on foreign direct investment, paints a relatively concerning picture of our economic situation. Although an economic recovery has occurred, it appears to be underwhelming. Most importantly, job growth has ground to a halt in the last quarter and FDI has slumped dramatically.
Furthermore, growth has been subdued in the most vital job-creating industries and government's strongest recovery-oriented interventions have by now worked their way into the economy without major effects. It would therefore seem that relative stagnation would be the most likely economic outcome for 2011; as opposed to 2011 being the "year of the job" as announced by President Zuma in his State of the Nation Address at the beginning of the year.
There are several aspects of the economic report that are substantively troubling to the Democratic Alliance (DA). Firstly, the rate and nature of economic growth for the period under review continues to be unimpressive. For 2010 as a whole, economic growth stood at 2.8%, whilst growth during the first quarter of 2011 stood at 4.8%. Although the 4.8% number during the first quarter of 2011 is an improvement on the low rate of 2.8% during 2010, it still does not come close to the levels needed to seriously address poverty and unemployment in our country.
It is commonly known that growth rates of 6 to 8% are required in order for South Africa to make significant inroads in terms of poverty eradication. Our current policy framework is also producing a growth pattern that is led by, and most focused around, the tertiary sector. Although growth in the tertiary sector is always positive, it needs to be complemented by growth in the primary and secondary sectors. Many of our people are not able to access and participate in the growth of tertiary sectors. Complementary growth in other sectors is therefore needed to ensure a more inclusive growth pattern.
Secondly, the DA continues to be concerned with the relative strength of the rand; which this report clearly identifies as a challenge. Many countries have intervened in currency markets to ensure the continued competitiveness of their currency valuations and indeed their export-oriented industries. The strength of the rand has placed our exporters in a distinctly disadvantaged position and some form of intervention is therefore warranted.
The DA believes that South Africa's position as a small, open economy places us almost entirely at the mercy of large international financial flows. Direct intervention by the Reserve Bank therefore seems inappropriate and would likely be ineffective. A more sensible approach could be to fully liberalise our exchange controls in order to allow for easier depreciation of the rand.
Thirdly, the DA notes the growing stock of debt that government has accumulated. Although we support the government's counter-cyclical stance, and therefore support the increases in government expenditure during the downturn and recovery of 2008/2009 and 2010, the growing stock of debt has begun to take on significant proportions and weakens our ability to counter any future shocks with further fiscal stimulation.
Government will very likely be forced to tighten its belt in coming years, even as the recovery seems to be relatively fragile. This would suggest that non-fiscal reforms and interventions might be necessary to stimulate economic growth and job creation in future as our fiscal space has mostly been spent.
Fourthly, the DA has consistently been advocating for interventions to increase the level of savings in our economy. This report reveals that the total level of saving has remained stable since 1994. Increased savings would allow for increased capital formation and economic growth and would therefore be hugely beneficial. The DA has proposed a tax cut on interest earned from savings in order to incentivise increased savings that would drive faster capital formation and economic growth. This report further solidifies our belief that such an intervention is necessary.
Finally, the DA must commend the Reserve Bank for its monetary approach during the time reviewed by this report. The relatively accommodating monetary policy has helped debt-ridden consumers and has driven higher household consumption and economic growth. It is however disconcerting that inflationary pressures are likely to force the Reserve Bank's hand at some stage in the foreseeable future. As inflation rises, the Reserve Bank will be forced to increase interest rates, and thereby put further pressure on the fragile recovery.
It is thus concerning that the accommodating approach followed by the Reserve Bank has only produced a moderate recovery in the last year, as inevitable increases in the interest rate will likely put pressure on the fragile recovery at some point during next year. It is entirely possible that the recovery could peter out as the government's inflationary interventions run their course and are followed by a forced relative tightening of both fiscal and monetary policies.
The DA therefore believes that the time has come for a new set of growth-oriented economic policies. These policies should aim to attract more investment, increase employment and grow businesses. We will engage the Zuma administration on the need for these reforms at every opportunity.
Statement issued by Dr. Dion George MP, DA Shadow Minister of Finance, August 4 2011
Click here to sign up to receive our free daily headline email newsletter
