SA Economy Pulls Back From The Precipice, But Significant Damage All The Same

Key points

• There is much relief at the ending of the NUMSA strike. We were fearful that a protracted strike in the manufacturing sector would send the South African economy into a tailspin and recession.

• However, significant damage has been inflicted both from a  short-term and long-term viewpoint.  The strike dealt a blow to business confidence and the desire to invest in the South African economy, whether short or long term. Secondly, the  duration of the strike was long enough to prevent some recuperation of lost production. Linked to this, smaller employers feel their viability has been threatened by the large wage increases that were agreed upon by larger companies and have embarked upon a lockout of NUMSA members, so  that  there will not be a  full recovery of production for some time, if at all.

• We are also disturbed by the manner in which the smaller employers' needs were completely overruled by the agreements  reached  between  the  so-called  Golden Triangle of  government, big business and organised labour.  In a country in which most employment is created in private sector small business, the outcome of the strike once again points to the lip service that is being paid to boosting job creation through small business.

• Linked to this, most ominously, the generosity of the wage agreement is likely to be followed by employment reduction in the sector, perpetuating a trend that has been in place for almost a decade now. It is also likely to increase pressure on public sector unions to press for substantial  wage  increases.  This  could  result  either  in further substantial industrial action in coming months,  or  alternatively  might  compel  the  government   to compromise on its deficit reduction programme, thereby  jeopardising  further  decisions  on  the  country's  credit rating by leading ratings agencies.

Relief At Ending Of The NUMSA Strike

In the run-up to the NUMSA strike, we had warned clients that the South African economy was on a precipice. Should the NUMSA strike continue for anywhere near the duration of the platinum mining strike, the damage to the economy would be enormous and a recession would be unavoidable. After all, there were three times as many workers involved as in the platinum mining strike and the impact would be far more widely dispersed across the entire economy. At the time, the industry expected a strike of fairly short duration because the wage offer of employers, at 8%, was not seen as being too far removed from the 12% demanded by NUMSA. As the strike went on beyond the two-week threshold, one had begun to fear for the worst and to read into the strike a major ideological revolt against the capitalist system in South Africa. The fact that a deal has been reached to end the strike therefore comes as great relief. Once again, it represents an example of the manner in which the South African economy is able to pull back from the precipice just before going over it. 

However, Significant Damage Has Been Inflicted All The Same

Despite this relief, it would be misguided to suggest that the damage inflicted on the economy by the strike, has been minimal. Yes, many businesses did plan for the strike and built up inventories to cope with it. However, the strike did last somewhat longer than many in the industry had hoped for and one senses that there was a considerable loss of production. Coming as it did soon after the platinum mining strike, it has undoubtedly contributed towards dragging down expectations of South Africa's economic growth for this year still further. We had indicated a fortnight ago that IMF forecasts for South Africa's economic growth for this year had been revised downwards by more than double the extent to which forecasts of global growth had been revised downwards. The impact of the strike has now been to cause the IMF to revise its forecast for South Africa's GDP growth for this year downwards still substantially further, to just 1.7%, from its 2.3% forecast made in April and its 2.8% forecast made at the beginning of the year. The 1.7% current forecast is a full 2.7% lower than the 4.4% forecast for 2014 growth made three years ago. In the interim, the downward revision of forecast growth for the world economy over this three-year period has been just 1.2%, significantly less than the extent to which South Africa's forecast has been pushed downwards. Unfortunately, one cannot escape from the fact that even if the strike has not plunged the economy into recession, it will still all the same have inflicted significant damage to overall economic activity, both in the short term and the longer term. 

Still No Complete Return To Normality

From a shorter term point of view, the reality is that a substantial component of the business sector affected by the strike is still not accepting the agreement reached between NUMSA and the large Steel and Engineering Federation of South Africa (SEIFSA). The National Employers Association of South Africa (NEASA), which comprises many more members than SEIFSA, has continued to resist acceding to the agreement to pay lower paid workers 10% per annum increases for each of the next three years as agreed upon between SEIFSA and NUMSA. Instead, it is embarking upon a lockout of NUMSA members. Not only does this presage possible violence and intimidation from picketing by NUMSA members at NEASA dominated small business establishments, but it implies that there will not be a full return to normality for some time yet. As it is, the duration of the strike, in being extended beyond the fortnight anticipated more generally by companies in the metals industry, is likely to have meant that many businesses will not be able to recoup lost production in its entirety. The impact thereof is likely to have been felt across many businesses beyond those immediately affected. 

Damage Inflicted To Longer-Term Investment Prospects 

Unfortunately, one fears that there will also be longer lasting adverse implications. The insinuation one senses from comments made by large multinational corporations is that the uncertain, volatile, militant and aggressive stance being adopted in the labour relations environment is becoming totally inimical to further investment in the country. No less a person than the Ambassador of the United States has commented on the fact that the escalation of industrial action over the past two years is calling into question the extent to which the US might want to continue having its companies involved in South Africa. Besides the adverse impact on foreign investment, it is also compelling many local businesses in the manufacturing sector to consider exiting or alternatively switching their modus operandi to service orientation rather than manufacturing, relying on imports to furnish required supplies instead. Finally, one should not underestimate the adverse impact on employment creation in the manufacturing sector arising from the obligation to pay significantly higher wages to workers without any compulsion on the latter to increase their productivity. As we have reported on in recent Ecobulletins, including yesterday's commentary on the latest employment statistics, remuneration per employee in mining and manufacturing has increased typically more rapidly in recent years than in other sectors, but the employment outcome has ended up being worse. Businesses are not passing the extra cost of labour on to consumers. Instead they have been inclined to limit the increase in their wage bill by reducing their workforce over time and moving towards greater mechanisation. If there is one almost certain outcome from the NUMSA strike it is that this trend is likely to accelerate in the wake of recent events. 

The Way In Which Small Business Is Being Ignored

There is further negative fallout from the NUMSA strike and that is the realisation that government effectively continues to pay lip service to small business activity. The resistance by NEASA and its members to 10% annual wage increments as being unaffordable, has been completely ignored not only by NUMSA, but by the Department of Labour which interceded during the strike to try and resolve it. An agreement has been reached, excluding the majority of businesses involved in the industry (even if their contribution to total sales is still minor compared with that of the bigger players). We are frequently informed that the greatest number of jobs created proportionately most prolifically are in small business, yet little attempt has been made to accommodate their requirements. NEASA has gone on record as saying that granting such big wage increases to its member workers was "suicidal" and would lead to massive job losses amongst such companies. Unfortunately, the structure of the economy is still being dominated by the so-called "Golden Triangle" parties, viz. government, big business and organised labour. Not a peep has emanated from the newly established Ministry of Small Business in relation to the strike. Instead, we have the ministers of Economic Development and Trade and Industry trudging around sprouting forth on the need for South Africa's economy to embark upon further industrialisation and infrastructural development as the key parts to job creation, yet the statistics vouch to the contrary. There is a further negative aspect to the latest set of events, in that many of the up-and-coming younger professionals of the country, witnessing the turmoil in the mining and metals industries, are becoming increasingly disillusioned with the future of the economy and are investigating employment opportunities abroad. The country can ill afford to lose whatever capacity it still has in the engineering and technical fields. Unfortunately, the authorities appear to be oblivious to the longer-term jeopardisation of economic growth that such a development might bring about. 

Republished by the FMF with the kind permission of Econometrix