1. Background to the economic recovery

The current economic recovery started in May 1993, to break a long recessionary phase which lasted for more than four years. Indeed, the economic growth performance in South Africa was rather distressing for at least a decade before the middle of 1993, during which period the average rate of growth in gross domestic product was less than one per cent per annum.

The recovery since May 1993 followed an unsteady path. It started off with growth of 5½ per cent in the second half of 1993 and then collapsed again into a contraction of 1½ per cent in the first half of 1994. In the second half of last year, it rebounded to +5½ per cent, but seemed to lose momentum again in the first half of 1995 with growth equal to only 1 per cent on a seasonally adjusted annualised basis.

As is well-known, the retraction in the first half of 1995 was mainly due to a decline in the production of two important sectors of the economy, namely gold mining and agriculture. Excluding the primary sectors, the rest of the economy continued to expand at a rate of more than 4 per cent, with manufacturing production increasing at more than 6 per cent, and the total services sector growing at 3½ per cent .

Over the 24-months period from July 1993 to June 1995, the growth in gross domestic production averaged 3 per cent per annum, which represented a significant improvement on the dismal performances of the preceding ten years. Total employment in the economy also started to increase again during 1993, although the number of additional jobs created was still less than the growth rate in the total labour force, with the result that unemployment increased further.

This improved performance in the supply side of the economy was well-supported by a firm rise in total gross domestic expenditure. Throughout the recovery phase of the past two years, the growth in total demand outpaced the growth in total production. In the second half of 1993, total gross domestic expenditure rose at an annual rate of 9 per cent , to be followed by 2½ per cent in the first half of 1994, 10 per cent in the second half of 1994 and 4½ per cent in the first half of 1995.

A rise of about 8½ per cent per annum in gross domestic fixed investment was the major force behind the rise in total demand, supported by sharp increases in commercial and industrial inventories, and a steady growth of about 3½ per cent per annum in real private consumption expenditure. Current government consumption expenditure rose by only ½ per cent per annum over the two year period of the recovery phase.

Two important questions now arise --- firstly, how sustainable is the present recovery phase of the economy and, secondly, can the economic growth rate be pushed to a higher level, to accommodate not only the growth in the labour force, but also create jobs for the absorption of the huge number of existing unemployed?

2. How sustainable is the economic recovery?

Three major constraints developed, or rather reappeared during the upward phase of the business cycle over the past two years.

Firstly, against the background of the rising domestic expenditure, and particularly the sharp increase in gross domestic fixed investment, imports from the rest of the world rose very sharply. In 1994, total imports rose by 27 per cent , and in the first half of 1995 by a further 15 per cent.  Merchandise exports also showed good increases which were, however, partly offset by a decline in the net gold production, with the result that the current account of the balance of payments moved into substantial deficit. This deficit deteriorated progressively from a seasonally adjusted annual rate of R5,4 billion in the third quarter of 1994 to R12,5 billion in the second quarter of 1995.

Over the preceding ten years, a current account deficit of this magnitude would have forced an immediate termination of the domestic economic recovery. The major difference on this occasion, however, lay in the capital account of the balance of payments where a large net inflow of R18,6 billion over the past twelve months provided sufficient foreign exchange, not only to cover the current account deficit, but also to add an amount of R10 billion to the official foreign reserves. It is true that more than fifty per cent of the net capital inflow of R18,6 billion represented short term capital, that is capital with an original maturity of less than twelve months.

The questions to be answered on the capital inflows are:

will the inflow continue and, if so, at what level?

how volatile is the capital inflows and how much of it can or will flow out of the country again should South Africa experience one of its periodic political or social upheavals?

When considering the composition of the capital inflows of the past year and the continuing unsettled political and social conditions in the country, and the danger of another international shock like Mexico of late last year, it will be prudent policy not to rely too much on persistent capital inflows of the magnitude of the past twelve months. It should, on the other hand, be recognised that the political reforms of the past few years made the world money and capital markets accessible for South African borrowers, and that a reasonable net capital inflow of, say, about US $2 billion (equal to R6 to R7 billion) per annum should be possible.

A second deficiency of the economy was revealed with the large increase in the demand for bank credit to support the increase in total expenditure. This excessive reliance on bank credit to finance economic expansion is a symptom of a relatively low level of saving in the domestic economy, a large deficit on the Budget of general government, and a growing demand for long-term funds to finance new investment in the private sector. Government is moving with determination towards a further reduction in the deficit before borrowing, which could release some greater part of private sector saving for the financing of new investment, but South Africa in general will have to consume less if a greater part of current production should be used for the expansion of the production capacity, and for the creation of more jobs.

A third constraint, reflecting underlying weaknesses in the economy, developed in the financial markets with a sharp rise in the level of interest rates, an unacceptably large increase in the money supply, and growing underlying inflationary pressures in the economy. Whenever the economic growth rate pushes through the 3 to 4 per cent level, strains in the financial markets tend to break out of conditions which are regarded as essential for maintaining overall financial stability in the medium and longer term. Without such financial stability, economic growth will in any case not be sustainable.

A more detailed analysis of these macro-economic constraints on growth leads to the following conclusion:

provided a reasonable amount of medium and longer- term foreign capital will continue to flow into South Africa; and

provided the deficit on the Budget can be reduced further and domestic saving can be maintained or even slightly improved; and

provided overall financial stability can be retained with disciplined and a rather restrictive monetary policy,

it will be possible from the economic point of view, to maintain growth at an average annual rate of between 3 and 4 per cent .

3. Can the economic growth rate be pushed to a higher level?

The second and equally important question is whether South Africa can lift its economic growth potential on a permanent basis to a higher level. Growth of only 3 to 4 per cent per annum is in the longer term not sufficient for the employment of all the unemployeds plus the regular addition to the labour force, and also not for meeting the many expectations of the people of South Africa. The changes of the past few years already lifted the ceiling on growth from a limit of about one per cent (as evidenced by the results of the preceding ten years) to about 3 to 4 per cent .

Basically, the South African economy is not competitive enough to enable it to maintain an economic growth rate at a level high enough for its own needs. More drastic economic restructuring will be needed to lift the growth potential of the economy to the desired and more acceptable level.

One of the major structural deficiencies of the economy remains in the labour market where relatively high wages combine with relatively low productivity to create an extremely high average unit labour cost for every unit of production delivered by the South African industries, mines or farmers. To what extent the implementation of the Reconstruction and Development Programme can address this basic problem is difficult to judge, but better living conditions, better education and training facilities and better health care must surely contribute to the improvement of the quality human resources. In the longer run, however, it is perhaps the spirit of mind of the people of South Africa alone that will succeed in making the country more competitive.

It is also necessary to lift the savings potential of the South African community to a higher level, particularly that of the personal sector. It is often overlooked that, in the language of the economist, saving is a decision not to consume. The decision not to buy a new motor car today and not to make use of the available bank credit for this purpose, is a decision to save.

In the longer run, it is obvious that South Africa should make itself less vulnerable on the balance of payments. This can be done in various ways, of which deliberate efforts to increase exports to the rest of the world is perhaps the preferred road. And success in the export markets is not dependent on a continuous depreciation of the exchange rate of the rand, but rather on greater efficiency in the domestic production processes.

Economic growth will, in the final situation, be dependent not only on an improvement in the economic structure of the country, but even more so on political and social stability. In the final situation, all business decisions are influenced by the overall environment in which they are taken.

The final conclusion is, therefore, that the chances are good that South Africa can, for the time being, maintain economic growth at the level of about 3 to 4 per cent per annum. Far-reaching structural reforms, which are not restricted to the economic environment, will however, be needed to raise the economic growth potential on a permanent basis to a higher level.