Macro Economic Commentary – July 2019

Author: Ntsekhe Moiloa

A former British prime minister, Winston Churchill, is an oft-quoted man. He was once quoted as saying “the inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.” The principle of shared suffering was highlighted several times during July as bond markets appeared to take a dimmer view of the long end of the yield curve in comparison to the short end. The worry about the long end of the local bond curve was a renewed concern about Eskom’s debt crystallising in the fiscus. The worry was not limited to the bond market as Moody’s warned that the additional financial support offered to Eskom was credit negative, despite welcoming it. Fitch changed its outlook from stable to negative. Some part of Eskom’s challenges in reforming the state-owned entity is the political unwillingness to allow substantial job culling of the kind that might have been permitted in a private enterprise facing the same challenges. And so, the citizenry is left to equally share in the misery.

As desirable as it might be to the capital markets, South Africa’s broader macroeconomic picture makes it exceedingly difficult for the political class to bite the bullet on Eskom’s bloated payroll. The Quarterly Labour Force Survey for the second quarter, released in July, indicated a decline in employment in the formal non-agricultural section of the labour market, a segment where newly unemployed Eskom workers would be likely to add to this overcast picture. The QLFS showed that the official unemployment rate had risen to 29 percent from 27.6 percent which in turn was 0.5 percent higher than the fourth quarter of 2018. The labour statistics have been showing South Africa ‘doing it again’ but in the wrong statistical categories.

In the east of the country horseracing jockey, Richard Fourie, rode Do It Again to a second consecutive Durban July victory early in the month. It is an ironic name for a gelding, but it might be less ironic when applied to the Conservative Party in the United Kingdom, which chose as party leader someone who seems even more determined to paint the country into a corner.

Newly installed prime minister, Boris Johnson, has vowed to take the UK out of the European Union by the end of October, with or without a deal. He has also stated the he will not visit Brussels or the leaders of other major European powers unless he secures agreement from them to renegotiate the Withdrawal Agreement. This is of course the man who used an expletive to describe the concerns of the business sector over Brexit. Indeed, Brexit brinksmanship is once again in laser focus as the pound slides, and to give some comfort to the worry warts, Mr Johnson has apparently fashioned an economic philosophy which he reportedly calls ‘Boosterism’. What that entails is big infrastructure spending and big tax cuts, not unlike Donald Trump’s enthusiasm for defense spending and tax cuts. Like Mr Trump, who fashions himself as the distinct opposite to his predecessor, Mr Johnson is rejecting the austerity politics of David Cameron and Theresa May before him.

However, Boosterism will not be relying on a healthy public purse for funding as June figures showed government borrowing at its highest level in four years. Gerard Lyons who is rumoured to be Mr Johnson’s preferred candidate for governor of the Bank of England argues that Britain has borrowing capacity; while Philip Hammond who recently departed as the nation’s finance minister argues that there is limited capacity before bumping into spending caps. Where Dr Lyons speaks the measured language of rising nominal GDP and low real interest rates, Mr Johnson, his former advisee as London mayor, speaks with booming voice of full-fibre internet that even technology chiefs suggest might be more dream than reality.

There is a bombast about Mr Johnson that is a pretense of his childhood hero, Mr Churchill. The Scotsman wrote that far from being Churchillian, Mr Johnson is more like the fictional Corporal Jones from Dad’s Army who is remembered for his excitability, his rambling efforts to make a point and his eccentric notions. In a sense, The Scotsman implied that Mr Johnson is seeking to resuscitate Britain’s past rather than build up its future. To understand how this differs to Mr Churchill, consider the late statesman’s famous quote on Europe where he said, “We have our own dream and our own task. We are with Europe, but not of it. We are linked but not combined.” With Mr Churchill the erstwhile power of Britain was vital as a platform, but the opportunity all lay in the future. Mr Johnson has a fiscal inheritance that is the result of years of tight strings on the purse, and an economy with record levels of employment. Yet part of the current strength of the economy is a sort of front-loading where businesses have been spending to prepare for a worst-case Brexit. Despite record levels of employment, the jobs are low-wage and insecure. Retail sales have recovered slightly but late payments by businesses under stress continue to be a pest. House prices are not yet growing year-on-year. Brexit as it is being conducted by the Tories threatens to eviscerate the existing platform by sending the economy into reverse with only the hope of a new one arising from its ashes.

Despite his acclaimed leadership of Britain through the Second World War, Mr Churchill was rejected by the electorate after the war for that part of him that still cherished the Empire. In a 2013 book review for the right-leaning The Telegraph, Nigel Jones called him “the last imperialist” and “by contemporary standards … undoubtedly a racist”. Although Mr Johnson has not seemed to care much what people think of him referring to Muslim women in burqas as “looking like letter boxes,” it is unlikely that Boris Johnson wishes to be remembered as the last prime minister of the United Kingdom or the first prime minister of England. However, the Tories sally forth with the risk that their central role in British politics will be sullied for a generation or more after the way they have conducted Brexit.