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Financial economists: mesmerised cheerleaders or compulsive liars?

23rd October 2015

By: Riaan de Lange

  

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It is the practice for the author of an article that appears in the financial press to make a declaration of interest. I thought that, as this week’s column is of a financial nature, I should make a similar declaration and state that I am an academically trained economist and that I have not plied my trade in the financial services sector. Further, I do not favour the use of econometric models in forecasting, for their assumptions define and undermine, and their trend reliance distracts and confuses. We were all given a brain for good reason.

This article highlights the overoptimistic forecasts and subsequent adjustment of South Africa’s economic growth – or gross domestic product (GDP) growth – which have become the norm in recent years. This while the South African economy has continued to deteriorate – and not unexpectedly so.

Economic growth simply means an increase in real GDP; in other words, an increase in national output and national income. Economic growth is the result of two main factors: an increase in aggregate demand and/or an increase in aggregate supply (productive capacity). As we start, bear in mind that South Africa’s economic growth in 2014 was 1.5%, which the International Monetary Fund (IMF), for instance, forecast in October 2013 would be 2.9%, a figure that was ‘revised down heavily [from] the IMF’s July 2013 World Economic Update’.

On October 6, the IMF slashed South Africa’s economic growth forecast for 2015 to 1.4%, down from 2%, its forecast on June 23. The IMF has also lowered its 2016 growth forecast to 1.3% from 2.1%, which is well below South Africa’s National Development Plan (NDP) growth aspiration of over 5% a year. (Any idea when last the South African economy grew at a higher rate than 5%? We will return to that later.)

Prior to these downward-adjusted forecasts, on January 20, the IMF had reduced South Africa’s growth to 2.1% from a previous 2.3% for 2015 and 2.8% to 2.5% for 2016. Thus, 2015 started with an IMF-projected growth of 2.3% and, 278 days later, the growth forecast is now 1.4%. If past practice is anything to go by, a further adjustment might well follow before the end of 2015, particularly considering that, on October 6, the South African Chamber of Commerce and Industry Business Confidence Index for September 2015 fell to a 22-year low.

But it is not only the IMF that is seemingly susceptible to continuous adjustment of arguably overly optimistic economic growth projections. In February 2014, the World Bank projected South Africa’s 2015 growth at 3.4%. In its ‘2015 Regional Outlook’, published at the beginning of this year, the World Bank forecast that South Africa’s economic growth would be 2.2% in 2015, 2.5% in 2016 and 2.7% in 2017. The bank subsequently reduced its growth forecasts for 2015 and 2016 to 1.5% and 1.7% respectively.

So, what is the origin of the figures that the IMF and the World Bank use in their analyses? They may well be derived from the National Treasury and/or the South African Reserve Bank (SARB).

The National Treasury forecast that the South African economy would grow by 2% in 2015, rising to 3% by 2017 – still way off the NDP’s 5% target. According to the National Treasury, the moderately improving growth outlook will be supported by continued economic growth in much of sub-Saharan Africa, as well as better terms of trade and inflation gains associated with the lower oil price and a more competitive rand exchange rate. The National Treasury expects that inadequate electricity supply will be a serious constraint on output and exports over the short term. ‘A more competitive rand exchange rate’ simply means that the South African rand is depreciating (weakening) against other international currencies.

For its part, in its ‘December 2014 Quarterly Bulletin’, the SARB published adjusted forecasts for economic growth for both 2015 and 2016 of 2.8% and 3.1% respectively. The central bank has since adjusted its growth forecasts to 1.5% for 2015 and 1.6% for 2016 – downward adjustments of 46% and 48% respectively.

This must, surely, raise some serious questions on the institutions’ forecasting. Some core questions. In particular, since the South African economy is not subjected to unanticipated and unexpected changes.

You do not have to be an economist, trained or otherwise, or be armed with or supported by an econometric model, to be able to spot a trend. Obviously, the initial economic growth forecasts are continually readjusted downward, which also occurred in 2014. So, why is it still being done? The initial economic growth projections for the following year tend to be higher (more optimistic) than those realised the year before. How can this be, particularly if there is no indication of a possible improvement in the economy?

This reminds me of a casino gambler, who, despite losing a hand, is prepared to remain optimistic that his or her next hand will be better, thinking that he or she was merely unlucky – this without there being any reason whatsoever or any possible cause for an improvement in his or her fortunes.

So, realistically, do you expect an improvement in South Africa’s economic growth fortunes? If so, what will it be? The sole positive for the moment is the low crude-oil price (which is not of South Africa’s making), which the IMF, for one, believes could lead to demand-side growth as consumers increase their spending. However, the economic growth could well be offset by the negatives (some of which are of South Africa’s own making), such as investment weakness, reduced capital flows (and the impeding introduction of the Promotion and Protection of Investment Act), constrained electricity supply (load-shedding), poor transport infrastructure, low labour productivity, pressure on emerging market currencies, increases in administered prices, a growing public service and an increasing wage bill, as well as a decline in commodity prices. It is obvious there are more negatives and very little, if any, indication that these will change in the foreseeable future.

Let us return to the NDP’s 5% economic growth aspiration. When last did the South African economy grow at more than 5%? In 2007, at 5.4%; in 2006, at 5.6%; and in 2005, at 5.3%. These were the only years since 1994 that economic growth exceeded 5%. South Africa’s lowest economic growth rates since 1994 were 0.5% in 1998 and 1.5% in 2009 and 2014.

So, how are economists getting economic growth projections so wrong? Could part of the answer lie in the article ‘Economists lie more’? Here is an extract from the article: “Economists have a bad reputation, and this does not date from the recent crisis. This comes largely from those willing to prostitute themselves for various think-tanks, lobby groups or trade groups, or their employer, rather acting like a spokesperson than a critically thinking and independent economist. Many of those call themselves economists without actually being one (hence, the earlier call for certification). In the end, the general public think economists are lying, mostly.”

Financial-sector economists are, at best, mesmerised cheerleaders, not wanting or willing to acknowledge the true state of the South African economy and its real challenges and constraints. At worst, they are liars.

Perhaps Vicente del Bosque, the current coach of football world champions Spain – regarded as one of the greatest managers of all time and the only football manager to have won the Champions League, the European Championship, the World Cup and the Intercontinental Cup – has the answer: “No one knows anything about economics. It’s the great lie of the economists. By contrast, in football, people might have contrasting opinions, each of which has some validity. But the economists always speak in conditionals – what a mess!”

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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