More job cuts are on the cards if the economy does not stabilise

South Africa got off to a rocky start this year, with almost 6 000 possible job losses in just the first month.

And things are likely to get worse before they get better. Investments have been low, and companies are barely surviving hence the numerous retrenchments which put even more strain on demand and economic growth.

Jobs are the bedrock of economic growth and political stability.

When the citizens of a country are employed it means they can provide for themselves, their morale is high, and things are stable. Employment is also an indication of production and investment, leading to the creation of more jobs.

When a developing country such as South Africa is seeing more and more job losses, it reflects a weak enabling environment for businesses.

Read: Telkom in talks with 20% of workforce over cuts as economy wilts

Indeed, the ease of doing business has declined steadily this decade as the regulatory burden placed by the state on businesses has increased. Poor management in some companies has also weakened the business environment, even causing corporate failures, leading to job losses.

Read: Massmart could cut 1 440 jobs

Mike Schüssler, chief economist at Economists.co.za, says the downsizing seen  in January so far is likely to continue this year.

More people, fewer jobs

“If you look at the number of people employed, it has been decreasing for at least three or four quarters and the chances of that continuing are very good,” he says.

Schüssler says one of the main issues is that the formal labour sector continues to outpace job growth. “So we will continue to see a number of people that are unemployed.”

The employment rate in the country decreased to 42.4% in the third quarter of 2019. It averaged 43.17 % from 2000 until 2019, reaching an all-time high of 46.17% in the fourth quarter of 2008 and a record low of 41% in the first quarter of 2004.

Unemployment exceeds 29% and has reached highs last seen in 2003 as population growth continues to increase.

The graph below depicts how unemployment has risen from 26.5% in January 2017 to 29.1% in 2019.

South Africa’s unemployment rate

On average, worldwide unemployment is at 6.97 %.

“Many developing countries are far less in unemployment than us. I think a typical unemployment rate for us would be at below 15% but the best must be below 10%,” Schüssler says.

South Africa’s metro cities are growing at a staggering rate and, according to Schüssler, could help unlock South Africa’s growth potential.

“We have a situation where some of our cities are growingly quite rapidly and that is where the unemployment issue could be solved easier than the unemployment in the rural areas,” Schüssler says.

He adds that if cities such as Johannesburg, Cape Town and Durban were to have economic growth of 6% to 9% – “because they are an engine of growth” – then the smaller urban areas could grow at 5% to 7%, with the rural areas at 3% so that South Africa could have economic growth of at least 6.5%.

He says this would ensure that economic growth is growing at a higher rate than inflation.

“We also want our share, we also want our increase to be higher than inflation,” Schüssler says.

Schüssler suggests that in order for there to be a turnaround in the economy there needs to be a radical look into how more firms could be encouraged to establish businesses in the country.

“Once we get that going, I think we can get unemployment to grow at roughly 1% year on  year,” he says.

Another downgrade looms

Moody’s, the New York-based rating agency, is scheduled to deliver its country review on March 27 after the national budget is presented in February.

Annabel Bishop, chief economist at Investec, says they foresee an evenly weighted chance that SA will be downgraded this year, versus that it won’t.

Bishop says Moody’s has said SA would avoid a downgrade “if the government’s efforts to rein in spending, improve tax compliance and lift potential growth became increasingly likely to successfully stabilise debt ratios” and if “National Treasury has put forward key areas where expenditure cuts need to be made to consolidate the government’s finances materially”.

“Moody’s says SA [has a] negative rating outlook, which indicates the agency will downgrade SA unless it returns to a stable outlook,” Bishop says.

A downgrade is more likely if, as Bishop says, the outlook “reflects the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures”.

Challenges

“The challenges the government faces are evident in the continued deterioration in South Africa’s growth and public debt trends; [this] specifically includes cutting above-inflation civil servants’ remuneration growth. If unsuccessful SA will likely see a rating downgrade,” says Bishop.

The agency already placed SA’s long-term sovereign debt on a negative outlook towards the end of last year, indicating that it plans to downgrade SA to sub-investment grade, from its rating on the last rung of investment grade, if SA does not make the necessary changes that would allow its rating to return to stable.

SA is at risk of seeing an economic growth rate of below 1% year on year this year as a number of structural problems remain unresolved. This comes after a growth rate of likely below 0.5% year on year in 2019, not least due to substantial, periodic losses of electricity supply.

Moody’s has shown marked concern over the slowdown in economic growth in SA. The agency most recently said it “forecast[s] medium-term growth of 1%-1.5%”, but 2020 risks being below this, at 0.8% year on year.