Old Mutual warns South Africa will never get the economic growth it needs

South Africa will never achieve economic growth of 5% to 6% on an annual basis unless reforms in its electricity and logistics sectors are matched with an overhaul of its labour market and a deeper pool of skills.

This is feedback from Old Mutual’s chief economist, Johann Els, who outlined South Africa’s difficulty in reaching significantly faster economic growth in his Mid-Year Economic Outlook. 

Els is broadly positive about the South African economy, with a combination of structural reform and cyclical factors expected to lift the country’s economic output to 2.5% to 3% for the coming decade. 

This is in stark contrast to the country’s past decade, where economic growth averaged an annual rate of 0.8% due to mismanagement, corruption, and declining business confidence. 

Since 2008, the country’s annual economic growth rate has averaged 1.1%, which is less than its population growth rate and insufficient to drive sustainable employment growth. 

As a result, South Africa is facing a myriad of economic and financial challenges, from record-high unemployment to an unsustainable government debt load. 

Els expects this picture to change in the coming years as reform gathers momentum and sentiment improves. 

In the immediate term, economic growth is going to be driven by cyclical factors, in particular lower interest rates and inflation, that will push consumer spending higher. 

Longer-term economic growth will have to come from increased investment in the country and a significant redcution in structural constraints. 

In this regard, South Africa has made some good progress, with substantial improvements in the supply of electricity and the efficiency of the country’s logistics network. 

Els said these improvements will drive economic growth higher for the next decade towards an average of 2.5% to 3%. 

Crucially, these reforms increase private sector participation in the economy, which will result in improved investment and economic outcomes. 

This increased participation alone will have a material positive impact on sentiment and investment, translating into increased employment and economic growth. 

The graph below, courtesy of Els and Old Mutual, shows South Africa’s economic growth since the end of WWII, with a noticeable slowdown in the past decade. The thick green bar shows where Els expects growth to average in the next decade. 

Not enough

While this is a vastly improved economic performance in comparison to the past sixteen years, it is not enough to drive meaningful social changes. 

Els said that if South Africa wants to effectively address its unemployment crisis, it would need growth above 5% per annum. 

This will not be achieved in South Africa over the next decade, Els said. This rate of growth is prevented by structural constraints on the economy that are yet to be addressed. 

While issues in the energy, logistics, and water sectors are being addressed, with local governance also being tackled, South Africa’s rigid labour market is yet to be touched. 

Els explained that South Africa’s rigid labour market, its significant skills deficit, and overregulation of labour will prevent 5% to 6% economic growth on a sustained basis. 

In its most recent economic survey of South Africa, the Organisation for Economic Co-operation and Development (OECD), anaylsed the growing mismatch between worker qualifications and the available jobs in South Africa. 

This leaves many university graduates unable to find stable employment, which significantly constrains economic growth. 

The mismatch is compounded by a severe lack of university infrastructure and the high cost per student in the country, which prevents many from accessing higher education or further training.

The OECD said that South Africa’s labour market is characterised by persistent mismatches between workers’ qualifications, fields of study, and available jobs. 

This highlights a shortage of skilled and semi-skilled workers in the country, which ultimately constrains long-term economic growth. 

Skills shortages persistently due to a lack of quality education, despite the significant progress made in recent decades. 

According to the latest data, 45% of men and 46% of women in South Africa between 25 and 64 years old had more than a secondary education. 

In comparison, the average for an OECD country is 79% of men and 81% of women. This emphasises South Africa’s poor educational outcomes. 

The organisation added that this reflects severe inadequacies in technical and vocational education and training programmes. 

This is part of a broader issue within South Africa’s higher education sector – the failure of it to align its programmes with the skills demanded by the labour market. 

The OECD also called for more teachers and university lecturers with real-world industry experience and greater use of internships to better prepare students for the demands of the job market.