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Russell Lamberti and Gerhard van Onselen discuss the SA macro-economy and the health of the labour market

Tuesday, March 27th, 2018

In this conversation Morné Malan (Solidarity Research Institute) talks to Russell Lamberti (ETM Macro Advisors) and Gerhard van Onselen (Solidarity Research Institute). Topics covered include:

  • Solidarity-ETM Labour Market index results and a broader look at the health of the labour market
  • The prospects for wage increases and job security
  • The SA macro-economic environment, including the rand and the recent rise in banking stocks

Click here to read the Labour Market Report online.

A transciption of of the interview follows below. 

Malan: Hi, my name is Morné Malan of the Solidarity Research Institute. I am joined by Gerhard van Onselen, senior economics researcher at the SRI, and Russell Lamberti, chief strategist at ETM Macro Advisors. We’re here to discuss the latest version of the Solidarity-ETM Labour Market Report.

Gerhard, firstly, what does the report intent to track?

Van Onselen: Well, in essence, it’s the Solidarity-ETM Labour Market Report and index. And the index is basically a measure of job and wage security in the South African labour market.

Malan: Russell, what are the results of the latest report, this is for the fourth quarter of 2017?

Lamberti: The index has been declining for a number of years. So, it’s been showing pretty bad news. Labour markets have been tough, job and wage security has been quite weak. Most recently the index has improved slightly and it’s sitting in roughly neutral territory, which means employees are neither feeling much more secure or much less secure. The business cycle is sitting in fairly neutral territory. Labour affordability remains quite low. We need to see much more economic growth to get affordability going.

So on the whole it’s a bit of a mixed picture I would say, with a little bit of good news, maybe, starting to come through; a little bit less gloomy than we saw in 2016 and 2017. And so, maybe that can be some hopeful news going into 2018.

Malan [1:37]: Gerhard, the index has edged closer to round about neutral, which is 50. Where would you expect a healthy economy to be? Where would you expect this index to track?

Van Onselen [1:49]: That’s correct, the index improved from 48 to 49 in the fourth quarter of 2017. A healthy economy is an economy that is growing; we would expect the index around 60, which is much higher than the index is performing at present.

Malan [2:06]: Russell, there are also various macro-economic issues at hand, one of these being the industrial production numbers. Do you have any comment on that?

Lamberti [2:15]: For ten years now the manufacturing sector in SA has been going just about nowhere, beset by terrible industrial policy, too much regulation, far too many trade barriers. But what we have seen in the last couple of years is commodity prices recovering off their lows in 2014 and 2015. That has helped the mining sector recover a little bit. We’ve seen that feed through into the manufacturing sector, helped also by global demand factors that have improved a little bit.

If you look at the industrial sector as a whole, we’ve actually seen some improvements in the last few months, but again, overall industrial output is still lower than it was back in 2006 and 2007. So, we’ve improved in the last year of so, but for the last 10 years there’s been just about no improvement. That’s really, I think, the big backdrop to all this that South Africa has been sitting in this kind of structural stagnation.

We produce about as much electricity as we did 10 years ago. Building confidence remains pretty weak, the manufacturing sector only slightly improving now. Even mining, commodity prices are high, but then the rand gets stronger and that makes it harder to earn good mining revenues. And we know that policy behind the mining sector has been really challenging, with things like the mining charter. So overall, there’s been recent good stories, but the long-term picture has been quite bad.

Malan [3:49]: You mention the rand, of course it’s bad for the mining sector, but for South Africans in general? Shouldn’t it be quite positive?

Lamberti [3:54]: Well, look, it’s not even necessarily an outright bad for the mining sector, because mines have to import a lot of inputs and that means they get better prices on a stronger rand. A stronger rand also encourages cheaper cost of capital, more savings, better capital accumulation and investment in the industrial sectors. And, of course for consumers, for manufacturers, we’re heavily exposed to the global economy, we import a lot of goods. So, a stronger rand makes importing goods cheaper. That helps business. That’s probably going to aid some margin relief for companies and, maybe, even improve job security a little bit. Certainly for consumers a stronger rand is great news.

Retail sales always tend to do well when the rand is strong, it keeps prices contained and inflation relatively low. The Reserve Bank is not going to hike rates too aggressively in this type of environment, if anything, maybe, they are going to cut interest rates. And so, this is the backdrop, a strong rand is always good for the South African economy; there are various groups of people who say we need a weaker currency, but we all know that when the currency weakens prices go up too much, things get very expensive to import and that is not good for SA.

Malan [5:05]: Moving back to the index, Gerhard, what do these numbers mean for ordinary South Africans there where the rubber meets the road? How should they feel and what exactly does it tell them about the labour market in South Africa?

Van Onselen [5:19]: I think in essence we need to view the index in terms of it being neutral. So, we’re not expecting a massive boom in employment or wage settlements. What we do see is, also, labour affordability being quite under pressure, being a drag on the index. Well, the certainty that employees have in their jobs, that is at neutral, but that’s not really that great. And also then business cycle indicators, they have improved somewhat, they are still not really in boom territory. In essence it is a difficult labour market, it is better than it was a couple of quarters back, but in essence it’s not really very strong.

Lamberti [5:57]: That’s not really saying much, because it [the labour market] was under serious strain.

Van Onselen [6:01]: Exactly.

Malan [6:04]: So, it’s improving off a very low base?

Lamberti [6:06]: Improving off a low base and, I think, what it means for people out there is that they’re in an environment that continues to be quite difficult, quite tough. There’s some short-term relief that’s coming through. It’s not the type of environment that would typically be associated with aggressive wage demands, aggressive job negotiations. It’s still a tough economy out there.

Malan [6:32]: To a large extent these numbers are still tracking the Zuma era, aren’t they? Which to a certain extent, despite the improvement, you can’t really credit any of the new developments.

Lamberti [6:40]: No, the politics, the political changes we’ve seen recently: A, are very recent, and B, are a little bit ambiguous. We’ve got in some respects a more accomplished president, but in other respects the land expropriation vote in parliament that has created a tremendous amount of political uncertainty. So yes, we’ve seen this benefit in the financial markets, the strong rand coming through in December, January, February, but, too soon to see it in the hard economic numbers, which we may start to see come through in the start of this year [2018].

Malan [7:22]: To what extent do you believe the improvements that we are seeing are related to external global factors as opposed to internal factors which might show improvement within the South African economy?

Lamberti [7:30]: It’s a great question and I think it is the question right now. Up until now it’s mainly been an offshore-driven story. China stabilised after 2015 and 2016. America’s economy is growing again. Europe’s economy is growing. These are big trade partners of South Africa. So, that is what is improving things, but if you look deep domestically, you are not seeing a lot of domestic improvement. That’s in some ways being reflected in the index, which is that we don’t have a big rush to hire new staff, businesses are not expanding rapidly, investment levels remain pretty low. So, I think, with political changes that have happened recently investors need to see a few years at least, maybe even five years, of good policy.

You know people have been burnt in the last ten years under the Zuma era. They are going to take a while before they trust the ANC again and before they trust policy. That is the long rebuilding process that now takes place. We are not just going to see it in the domestic numbers immediately, it is still an offshore dynamic. And as a result, if the offshore economy, if the global economy slows down, has a recession, has a financial crisis of sorts, South Africa is quite fragile in this kind of position. We are not robust enough domestically, I think, you’d see renewed pressure on the currency and so on. For now, we thank our lucky stars in a way that the global economy is going through some degree of recovery.

Malan [9:06]: A rather good proxy for the South African economy is the JSE’s banking index. And you also looked at that in our macro-economic picture. What did that show you?

Lamberti [9:20]: Bank stocks came under huge pressure in early 2016. Remember the finance minister, Nhlanhla Nene, was fired very unexpectedly. We had a new finance minister and then Pravin Gordhan took over. But throughout that uncertainty there was a sense that the state had been deeply captured, that it was deeply corrupt and that things like the Treasury, the SARB, the Revenue Service and so on would fall into deeply corrupt kind of hands.

So what happened was interest rate expectations went very high. The market started expecting the SARB to hike rates and banks as a result got very scared to lend money. And that’s all reversed, or at least, a lot of that has been reversed, people now expect the SARB to cut interest rates, there is much more political certainty, we think. There is less sense that we are going down a very bad road politically.

So as a result banks are getting more confident and the market just rerated bank stock higher. And so share prices of banks just jumped 30% in the last few weeks. Banks are a good barometer of expectations of what’s going to happen in the local economy. Whether those expectations will actually be fulfilled in reality will remain to see, but the market is very confident in the banking sector.

Malan [10:40]: So, a reasonably optimistic picture relative to where we were last year. What are your expectations going forward? Could we see some reforms? What should we expect in the local economy?

Van Onselen [10:52]: In terms of reforms we have to give the Ramaphosa administration some time to kick in and to take on these reforms that are necessary, but, in essence, up to this point we haven’t seen much of a deviation. I think the Budget was not very much a deviation from ANC policy beforehand. We are hopeful that reforms can happen. Some signals possibly are reforms on the state-owned enterprises (SOEs) that may be coming, but, in essence, we still need to be very vigilant and see how it pans out.

Malan [11:24]: Russell, Gerhard, thank you very much for your insights. I am Morné Malan of the SRI. Have a lovely day.

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