As usual, when GDP statistics were released this week, there were various analyses of what this means for South Africa. The obvious interpretation of an economy growing at less than the country’s population growth, which is captured in GDP per capita, is that South Africans are getting poorer.
In simple terms, when the country is adding more people at a faster rate than the growth of economic resources to support those people, on average everyone is getting poorer. This is visible in declining service delivery levels, public infrastructure decay, and the general psyche of the nation which is downbeat as the fourth quarter FNB/BER consumer confidence index shows — it’s at -17 index points and the lowest festive-season confidence in two decades.
This assessment reflects the here and now, and the obvious. But there is a different angle, which is looking at investment trends, that must lead us to answering what is to be done for this trend to change in a meaningful way.
Gross fixed capital formation contracted by 3.4% in the third quarter, the first contraction following seven quarters of expansion. General government investment led the decline, contracting by 4.5%, followed by public corporations which contracted by 4.1%.
If businesses are not investing in new capacity, the economy does not grow and does not create employment opportunities
Quarterly private business investment contracted by 3.1%. In the past 12 quarters, the growth in general government investment expanded in six quarters with an average annual growth of 2.1% and public corporations expanded in 10 quarters with an annual average of 3.9%.
Private sector investment expanded in nine of the 12 quarters with an annual average growth of 2.6%.
On the face of it, this is promising but the longer-term trend still shows a concerning picture. Investment by general government is still 11% below pre-Covid levels (2019 average), while investment by public corporations is 9% below pre-Covid levels. Investment by private business is only 3.5% below the pre-Covid level.
There are only two sub-categories of investments which have recovered to levels before Covid — machinery and equipment, as well as other assets. Machinery and equipment, where renewable energy investments are captured, now stands just over 7% above 2019 levels, while other assets, which captures investment in digital technology and software, is 13% above the 2019 level.
These two categories have nothing to do with business confidence and therefore should not be used as a temperature check of how the business community is feeling about the attractiveness of deploying more capital in the country.
In any case, the RMB/BER business confidence index sits at 31 points, implying that 69% of business executives are dissatisfied with prevailing business conditions, which means they will not be aiming to make new investments in new productive capacity.
Investment in residential buildings is 16% below 2019 levels. Construction and transport are 17% below, and non-residential buildings sit at nearly 40% below 2019. This shows how slow and far behind investment growth is, which is what really drives economic growth.
One of the consequences of corporates being forced to invest in their own electricity generation to cushion themselves from load-shedding is that they focus more on resilience and protecting existing capacity instead of investing in new capacity.
If businesses are not investing in new capacity, the economy does not grow and does not create employment opportunities. The more damaging result is that the investment in that which the state provided, but can no longer provide, reduces the pool of available funds for investing in other productivity enhancing activities.
Effectively, the multiplier effect of remaining investment opportunities will likely be reduced. It is like the Springboks playing with half the team; there is no way they could beat any decent team. Even in a miraculous scenario where they at least defend they are unlikely to score tries.
What is to be done? It doesn’t look so complex if the willingness is there. Given dysfunction in rail, the private sector has found a solution in roads, albeit inefficient. It has also found solutions where the Post Office left a gap.
The same applies in education and health, the growth of private providers is proof that with the right regulatory frameworks, the sector can provide the goods and services where the state fails, yet remain profitable.
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