Hot topic: Even more are unemployed

Dynamic Wealth

A new survey shows that the impact of the economic recession on the South African job market is much worse than could have been imagined by even the pessimists.

According to the latest All Media and Product Survey (AMPS) of the South African Advertising Research Foundation’s (SAARF), more than 750 000 workers lost their jobs during the six months from December 2008 to June 2009.

Almost 75% of the 762 000 that lost their jobs were full-time employees. Approximately 75% of this group were in the low and medium income groups that earn up to R300 000 per annum.

Prof. Carel van Aardt of the Bureau of Market Research (BMR) at the University of South Africa states that these figures indicate that household disposable income may decline much more than was initially expected. Should this be the case, the economy might contract by 2.2% this year.

Van Aardt says that based on these figures, households’ disposable income has contracted by 4.2% compared to last year.

This is worse than the previously expected 1.8% contraction.

The expected contraction is based on the Labour Force Survey of Statistics SA which found that 475 000 workers were retrenched during the first six months of the year and the subsequent estimation that 680 000 workers might be retrenched during the whole of 2009.

According to the figures of the AMPS, the majority of job losses were in the professional technical occupations in the manufacturing sector. Approximately 338 000 workers in this occupation category were retrenched.

The second largest number of job losses of around 180 000 was in agricultural occupations. The transport and telecommunications sectors also experienced considerable retrenchments of about 124 000 workers.

Van Aardt says that a prominent pattern that emerges from the figures, is that full-time employees who have been retrenched migrate to the part-time category. They now try to make ends meet by looking for job opportunities from home. This is quite common in the emerging middle class.

In the high income category that earn more than R500 000 per annum, it appears that several consultants have lost their fixed contracts and have started working part-time.

Apart from larger than expected job losses, Van Aardt reveals a gloomy outlook for the unemployed.

Owing to the more militant behaviour of trade unions, numerous companies have made their intentions known to consider capital intensive production methods to replace labour. Should this happen, it could take years to re-employ the unemployed.

According to Van Aardt, the figures show that the South African economy is in need of a considerable injection to get back on track. The government has already suggested that it will not consider a bailout package, and the private sector is under pressure and thus restricted to minimal investments, the injection can therefore only come from the export sector. The strong rand and slow global demand are hampering a recovery from this sector.

As a consequence, the South African economy will not have a speedy recovery. Van Aardt argues that the South African Reserve Bank should strongly consider lowering interest rates even further. This is compelling if borne in mind that bleak demand expectations pose no inflationary threat in the wake of another drop in the interest rate.

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Economic Matters: Electricity price hikes effects on the electricity demand and the economy as a whole. What should we expect in the future?

Roula Inglesi and Reyno Seymore

In Afrinem’s July 2009 newsletter, the article “Eskom’s 31.3 percent: Will the higher prices bring the desired results?” examined the effect of an increase in the electricity price on the economy, and in particular which sectors are vulnerable to this change. Finally, some critical questions about the adjustment of the economy were posed. After Eskom announced the company’s largest loss of R9.7bn in August, a new application for higher tariffs was due by the end of September.

In accordance with the previous analysis, we employ advanced econometric techniques, in an effort to answer two central questions:

·                      Will the quantity of electricity demanded be affected by the price changes?

·                      Which sectors will be most affected by the price increase? And what will be the true cost to the economy?

Price effects on electricity consumption

We use a model employed in a recently published paper, to introduce two scenarios to forecast electricity consumption until 2030, and to capture the effects of significant electricity price increases.

In the previous study, the Engle–Granger methodology is applied, according to which the following specification is used:

Long run:  

    

Short run:

Five variables are used in this study: real GDP, real electricity consumption, average electricity price, real disposable income and population. Internationally, reliable sources of data provide data for electricity consumption only until 2006, with the last figures still subject to change. Therefore, we limited the analysed to 1980–2005 and used annual data. The sources of the data are the South African Reserve Bank, Department of Minerals and Energy, Eskom as well as the International Monetary Fund (IMF).

The model estimated is as follows:

The standard variables (price and income) suggested by the theory to influence electricity demand, prove to be significant and with the correct signs. Variables driving electricity demand in the long run are disposable income and the price of electricity. On the other side, the short-run dynamics of the system are influenced by the Gross Domestic Product (GDP) and the population.

Two scenarios are introduced to forecast the electricity demand until 2030. Both of them use the predictions of the International Monetary Fund (IMF) about population: 1% increase per annum. At last year’s National Electricity Summit, a real price increase of price of 25% a year was agreed between the National Energy Regulator and Eskom.

Therefore, for this exercise, the following assumption holds for both scenarios: the electricity price will increase and double from 2008 to 2011 and then it will remain constant until 2025. The main difference between the two scenarios is that in the first one, economic growth will average 4% for the period 2009–2030; whereas, the second one proposes accelerated growth averaging 6% over the period 2009–2030.

The effects of the two forecasts on electricity consumption until 2030 are presented in Figure 1. Based on IMF calculations and Eskom policies, electricity consumption for 2030 is estimated to be 148,481 GWh or 158,288 GWh for the first and second scenarios respectively.

Fig 1. Electricity demand for South Africa 1990–2030 (forecast from 2006 onwards).

The electricity demand will decline within the range of 24% to 27%. It is important to mention that during the period 2006–2008, the forecasting is ex post and is used to evaluate of the forecast quality. The latest data that StatsSA released confirm the finding of this forecast: actual estimated consumption decreased by 2.1% in July 2009 compared to July 2008.

It is quite noticeable that regardless the level of economic growth, electricity consumption follows a consistent trend: a decline while prices are increasing and rising again with low growth rates while prices are constant.

More specifically, South Africa may experience an up to 27% decrease in electricity demand (comparison of 2007–2030 values) if the price of electricity doubles until 2011 and then remains constant with average economic growth of 4% for the period until 2030. The picture does not change much if economic growth is at 6%: the electricity demand will drop by 24% by 2030.

Price effects on economy

From a general equilibrium point of view, using a Global Trade Analysis Project (GTAP) model shows that a rise in the price of electricity can become detrimental for the different sectors of the economy as well as the economy in its entirety.

We assume in this analysis that electricity prices will increase by 30%. A once-off 30% increase will dampen real economic growth by 0.85% and result in a 2.25% decline in unskilled employment. Also, consumer spending and investment are expected to contract by 1.23% and 6.76% respectively.

More particularly, the mining and extraction industry could recede by an ill-afforded 1.07% following another 30% increase, and utilities and construction by a very substantial 5.42%. The transport and communication industry would forfeit 0.01% and heavy manufacturing 0.56%. The textiles and clothing industry, however, could gain 0.97% and grains and crops 0.89%. Light manufacturing would gain an estimated 0.31% if another 30% goes Eskom's way.

In terms of employment, a 2.25% decrease in unskilled employment is predicted while the skilled employment wages are expected to decline by 1.85%.

From an environmental perspective however, the benefits are significant especially with regard to CO2 emissions which will be reduced by 24 megatons. 

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Policy review

In an era of turbulent and challenging times passive information serves no purpose. To not only survive, but to be able to remain competitive, intelligent information is an imperative.

Policy review not only provides you with essential developments in government policy, but more importantly  provides you with the figures, facts, and analysis.

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Economic Indicators:
Prepared by Annari de Waal, Sherwin Gabriel, Roula Inglesi and  Bryden Morton