Feb 16 2015 07:48 Cees Bruggemans – Fin24
WE TEND to focus on tailwinds boosting growth or headwinds reducing it. Much rarer is the focus on growth momentum. What keeps us ticking over, even steadily, in the presence of many headwinds and few tailwinds? And can it persist, or will it die out eventually, like a wind becalming?
A given set of production factors (equipment, labour, management) can produce more simply by innovating. We end up calling it productivity.
Much new innovation is embodied in new equipment. One doesn’t need to expand capacity, merely replace old equipment with new, enhanced capabilities. Same applies to labour. And allowing for clever thinking doing new things better.
In the process some old stuff may get displaced (creative destruction) and new income generated.
The head count need not increase, yet output may keep rising, provided the productive sparking remains uninhibited. The profit incentive is often strong enough to keep things going in private enterprises with successful franchises.
In the public sector, it is the sheer size and inertia of the state, along with a tax base and borrowing capacity that allows forward momentum to go unchecked up to a point.
Both these vehicles are basically on automatic transmission. You need to actively brake them to prevent them from moving forward.
Though heavy headwinds may erode growth momentum, there remains a base load that can remain persistently active.
The stickiness of wage growth is one feature reinforcing these tendencies. Real remuneration growth tends to be baked into the cake in SA for strong enough insiders, giving them at least a minimum real income growth benefit, either because skill and talent is scarce, or unions negotiate using their collective market power or government exerts its political power.
In the process, real demand has an upside bias built in.
The poor can also benefit if a large enough social safety net has been created. We have, with 16 million social grant beneficiaries receiving over R100bn annually, and automatically adjusted for inflation (plus), either by way of real grant increases or more beneficiaries (and only in generous times both).
Similarly, the pricing behaviour of businesses, protecting their margins with cost-plus pricing, or at least ensuring inflation compensation or better in its pricing.
Credit need not be a growth engine, as long as it at least isn’t a restrictive feature. Credit growth approximating nominal GDP advances also accommodates the growth process here described, rather than stimulating or restricting it.
Modern SA has all these features. It goes a long way to explaining while some of our many headwinds haven’t quite killed off the growth momentum, even if not for a lack of trying.
Put differently, on being presented labour market statistics showing yet another year of steady, if very modest, growth in formal employment at a time when the economy really struggles to make headway, other data may collaborate what at first brush appears unlikely.
For instance, during a period of five years, reckoned from 4Q2009 to 4Q2014 (effectively the latest business cycle upswing), the SA passenger car park (total fleet on the road) increased from an estimated 5.4 million to 6.1 million cars, a gain of some 13%. Total formal employment grew from 9.9 million to 10.9 million, a 10% gain.
Perhaps slow and very modest, barely half what we could have done if we had applied ourselves more appropriately (and had been more lucky). But it is still growth at a time when Greek GDP cumulatively shrank by 25%.
We have a very intricate, finely meshed, insider economic machine that has inertia, alternatively retaining good growth momentum even in times of stress.
It keeps us ticking over while waiting for better times to arrive. That, apparently, is also part of our national economic DNA.
Certainly, there is the R100bn (annualised) oil purchasing power injection of recent months. That should lift sagging household spirits.