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Skills shortage holds manufacturing industry back from growing, evolving

Econometrix director and chief economist Dr Azar Jammine

Econometrix director and chief economist Dr Azar Jammine

24th October 2023

By: Marleny Arnoldi

Deputy Editor Online

     

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A major unaddressed issue in the manufacturing industry remains a shortage of skills, said economic consultancy Econometrix director and chief economist Dr Azar Jammine in opening this year’s Manufacturing Indaba on October 24.

South Africa has a mismatch between the skilled workforce needed in manufacturing and an abundance of no- to low-level skills. He noted that it was challenging to invest in and create a high-tech manufacturing industry while trying to absorb low-skilled workers.

This imbalance is undoubtedly affecting South Africa’s ability to embrace Fourth Industrial Revolution technologies and, therefore, improve its competitiveness.

The issue of the high cost of wages versus low levels of productivity was also plaguing the industry.

Jammine illustrated that out of every 100 students that begin school, an average of 60 write matric, 37 pass matric, 12 attend university, six get undergraduate equivalent diplomas and only four complete degrees.

Only three out of every 100 scholars end up getting more than 60% for maths in matric, which is a key foundation for the logic and reasoning skills needed in the manufacturing industry.

Moreover, manufacturing’s share of overall economic activity declined from 26% in 1990 to 13.6% in 2023 and remains 10% below pre-Covid-19 levels.

There are, however, subsectors within manufacturing that are doing better than before Covid-19, including automotive, while other sectors have seen a marked decline in economic contribution such as the petroleum industry.

Jammine explained that although de-industrialisation had been happening globally in recent years, it had particularly negative effects on growth, inequality, poverty and social cohesion in South Africa.

He added that there had also been a steep increase in machinery and equipment investment, with businesses adopting more capital-intensive techniques to do away with militant organised labour.

Jammine believes there to be an overall lack of coordination between industrial policy, macroeconomic policy, education and skills development, innovation and technological policy and trade policy.

This is evidenced by a decline in diversity of manufacturing, with the number of manufactured products being exported having declined from 201 in 2012 to 134 in 2020.

Across ten sectors of the South African economy, manufacturing has done better than construction and mining, for example, in recent years, but it is underperforming compared with agriculture and services.

Some forces for improved growth include increased collaboration between business and government, greater private sector involvement in State-owned enterprises, especially electricity and logistics, reduced loadshedding and increased fixed investment in renewables and transmission, as well as lower inflation and interest rates, and the upcoming election that may yield positive results.  

Notably, Jammine said, the forecast for gross fixed capital formation (GFCF) was more favourable than that of private consumption expenditure, which boded well for manufacturing. He elaborated that consumer spending had taken a knock on the back of high interest rates, with retail sales in particular having tailed off.

GFCF has been declining for some time, reaching 12.5% in 2020/21, but this is starting to tick up on the back of more investment compared with consumption expenditure.

“At the heart of the increase in GFCF has been investment from the private sector and even some State entities, however, the State and most of its entities have been primary sources of disinvestment,” Jammine noted.

It also helps that the trade weighted value of the rand is close to its lowest level in the last 30 years. Although a weak rand does not bode well for the economy, it does bode well for product exporters which benefit from selling in other, stronger currencies.

Factors that are affecting the rand negatively include commodity prices having fallen this year, intensification of loadshedding since the start of the year, although it has improved as of late, tighter global monetary policy impairing carry trade, the deteriorating fiscal situation as government revenue declines, a decline in tonnage carried to harbours, South Africa’s greylisting, which makes doing business more admin-intensive and costly and South Africa’s perceived dalliance with Russia.

Jammine expects the rand to further deteriorate against the dollar and other currencies up to 2026, which could be reversed if the political environment changes for the better following the election.

One short-term factor that has helped to ensure better gross domestic product growth than expected is reduced loadshedding intensity, as well as investment in the renewable energy and information technology spaces. It also helps that inflation has lowered to just more than 5%, compared with more than 8% a year ago.

On the electricity front, Jammine is confident that Eskom has made strides in improving maintenance, which leads to fewer breakdowns, while there has been an uptick in self-generation in the country on the back of policy reforms announced by government.

“The days of loadshedding are not over yet, but at least the prospect of extended Stage 6 phases is diminishing,” he added.

Jammine concluded that the private sector was carrying the manufacturing industry despite various headwinds, including residual and persistent damage from the State capture period and cadre deployment, which left many State institutions incapacitated and in debt.

Considering all the circumstances, he believes it to be positive that the economy has managed to grow this year, despite initial negative growth rate expectations.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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