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Pieter Laubscher delves into South Africa’s business cycle amidst “radical uncertainty,” examining the nation’s historical reliance on political crises and commodity windfalls for economic progress. He underscores two key factors: SA’s global exposure and the influence of its political structure. With poor national savings and heavy reliance on foreign savings, Laubscher explores the impact on economic trajectory. He discusses global economic prospects and the contrasting views on post-COVID recovery, emphasising the widening income inequality’s adverse effects on the business cycle. Laubscher concludes with a call for transcending the dualities of economic freedom versus equality, urging a paradigm shift towards compassion and values in economic thinking.

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Business cycle prospects

By Pieter Laubscher*

Background. In an age of ‘radical uncertainty’ it is worthwhile pondering business cycle prospects at a broad level. Acute observers of South Africa’s (SA’s) development may be excused for an overwhelming feeling of deja vue. The combination of deep political crisis and a commodity windfall, again promises the advance of the economy. The historian, Charles de Kiewiet noted: “South Africa has advanced politically by disasters and economically by windfalls.”

Hidden in the foregoing quote are two profound features of SA’s business cycle. The first is the international connection; and, secondly, the formative influence of the political structure. As a small, open economy, the country is highly exposed to global influences, both regarding trade and investment. SA’s re-integration with the world economy around the time of SA’s political transition in 1994 (in the age of globalisation) amplified this fact.

SA’s poor national savings performance renders the country dependent on the steady flow of foreign savings in maintaining macro-economic balance (read: a sustainable balance of payments and non inflationary economic growth). From circa 2002, consumption of households and the government gradually rose from around 75% to 83% of GDP in 2019, before the COVID-19 impact. Over this period, the ratio of net exports (i.e. the difference between export earnings and payments for imports of goods and services) plummeted from above 12% to a negative 3% on average.

The implication is that SA is very dependent on foreign savings in augmenting national savings in financing domestic investment. National savings as a ratio of GDP declined from 16.7% in 2002 to 14.5% in 2019, with more than 95% of these savings being depreciation allowances. This implies that little net investment in expanded production capacity occurred.

This perspective is important in appreciating global factors when considering SA’s business cycle prospects. Should the country suffer net capital outflows, the rand typically depreciates, causing cost-push inflation, in turn, inviting interest rates hikes, which slows down spending and real economic growth.

The political crisis is well-documented and the implications for SA’s economic future pretty much a binary condition: should the constitutionalists retain the upper hand (as the author firmly believes), the prospect of economic advance is real; the other scenario clearly suggests things will become worse before they (potentially) improve over the medium to longer term.

It is up to the political scientists to speculate and theorise regarding these prospects. The focus in the current article is firmly on the economic dimension, more specifically, on what bearing global economic prospects may have on SA’s economic trajectory.

Deep uncertainty haunts the global economic future. Most global economic forecasters are scaling down their outlook (see IMF World Economic Outlook, October 2023). Views on the post-COVID economic recovery tend to fall out into two schools of thought.

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The one camp was excited and less concerned about the unprecedented US (and wider) fiscal stimulus packages (measuring 9% of GDP in the US alone), combining with the (likely) success with vaccination rollouts in the advanced economies, driving a period of rapid economic growth. This camp saw a crisis-induced spurt of technology-led innovation (inter alia, AI) fuelling renewed economic growth in the US and elsewhere. The economic catch-up from the COVID-19-induced plunge in 2020 also drove key commodity prices higher (owing to shortages), delivering wider economic benefits. This did transpire.

Initially, this camp expected interest rates and inflation remaining low as the output gaps (in the US and elsewhere) were large enough to counter possible overheating pressures. A leading proponent of this camp was Paul Krugman, describing the outlook as a ‘goldilocks moment’ (New York Times, March 2021).

Paul Krugman is a seasoned economist and one who foresaw the GFC (in his book Depression Economics). He was strongly in favour of the full fiscal stimulus, saying ‘the unusual economic times call for unusual economic policies.’ For him, the world must adapt living with high debt levels. He did admit that he failed to see the full scope of the post-COVID cost-of-living crisis, amplified by monetary stimulus, but remained optimistic (and correctly so) of rapidly receding inflation in 2023.

To his credit, the massive impact of herculean policy efforts in the major industrial countries since the onset of the GFC must be acknowledged. While both the economic contraction and consequent fiscal packages were dwarfed by the COVID-19-induced counterparts, the US succeeded in avoiding a double-dip recession in 2009.

The Euro area sovereign debt crisis in 2011-12 did lead the region into a second leg of the recession; however, the then President of the ECB, Mario Draghi’s, efforts “to do whatever it takes” lifted the region from recession in 2013.

China responded to the Great Recession by a gigantic debt-financed macroeconomic stimulus programme centred on infrastructure investment, which sustained the commodity ‘super-cycle’ until 2011. In the words of another seasoned economist, Joseph Stiglitz, it ‘succeeded to save the world.’

These efforts cleared the way for the first post-2009 business cycle dynamic of increased confidence, investment and employment growth, particularly in the world’s largest economy, the US. Yet, the business cycle that ensued from circa 2016, disappointed in the end, despite Donald Trump’s best efforts in providing a sweetener by way of aggressive tax cuts (second half of 2017).

US and wider economic growth began tapering quite sharply through 2018-19 before the pandemic hit. The financial markets recovery from the ensuing crash (March to May 2020) has been nothing but spectacular. This moved the first camp accepting the prospect of a V-shaped economic recovery. The second camp disagreed.

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The other camp pointed, amongst other, to one constant through all the above, i.e. the inexorable worsening of income inequality and the adverse economic consequences thereof. The policies adopted in ‘saving the world’ (economically) have multiplied economic inequality (see Michael Pettis, Economic Consequences of Income Inequality, March 2014).

The markets’ rebound from the pandemic impact fuelled the riches of the so-called ‘one-percenters,’ while it multiplied the miseries of the rest. The question is whether this matters? Yes, it does.

Apart from the moral issues and attending socio-political risks, increasing income inequality has adverse implications for the global business cycle. This becomes clear when understood at the global level, and since we still do not have inter-planetary travel (yet!), that aggregate global spending (i.e., consumption and investment) equals income. Furthermore, we know that saving equals investment. These are economic identities.

Higher income inequality means that the savings propensity across the globe rises as the rich continues to disproportionately attract the income. This translates to reduced consumption relative to global GDP. As the share of global consumption declines, producers across the globe experience higher unsold inventories and unproductive investment. This, in turn, translates into retrenchment, business closures and lower income and saving to, again, equal the lower level of investment.

In all, rising income inequality undermines effective demand and productive investment and therefore the business cycle. The second camp believes productive investment will be undermined to a larger extent than crisis-driven innovation and technological development will boost it.

The bearish capital market in the years before the pandemic impact is explained as it persistently expected low inflation and real economic growth. This camp saw the cost-of-living crisis induced increase in US long-term interest rates as a temporary phenomenon. Inflation was likely to surprise on the low side. Witness the latest producer price inflation numbers in Europe, which may soon return to fighting the deflation grizzly bear.

Thinking about the COVID-19 pandemic impact, it exacerbated all these tendencies. The herculean macro-economic stimulus packages tend to recycle in the financial sector. It must be acknowledged, less so with COVID-19 compared to what transpired at the time of the GFC.

The adverse economic impact from lockdown and travel restrictions tended to fall disproportionately on the more vulnerable small business and informal sectors of the economy and they discriminated across regions, income and gender groups (Economist, January 2021). The question becomes how long the world can endure the high and deteriorating levels of inequality?

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In all, a binary world view? At the core is the issue of economic freedom versus order/equality. It is as if the world, facing a divergent problem, continues attempting to solve it as you do with a convergent problem (EF Schumacher, Guide to the Perplexed, 1977). Designing and projecting a space vehicle to Mars is a good example of a convergent problem, solved by science and deterministic mathematics. Solving a divergent problem, such as that of economic freedom versus equality, demands transcending the presumed duality.

At this level, duality disappears when the higher values of life, love and compassion, are transcended. This shifts the range of possibilities. Compare how Integral Thinking, according to the world’s leading philosopher, Ken Wilber (A Theory of Everything, 2000), is gripping our world.

It would surely imply a major shift in economic thinking and policies. Values such as love and compassion need to be re-integrated with general economic thought, displacing James Mills’ utilitarianism (“the greatest happiness for the greatest number”), in turn, inspired by David Ricardo’s moralisation of self-interest, which Adam Smith suggested was always constrained by one’s enlightened (longer term) interests.

Alternatively, to the extent that Keynesianism in general – and specifically the Marshall Plan, intended to finance European post-WWII reconstruction – was a time of greater compassion, the pendulum of history surely should swing this way again at the current juncture.

A paradigm of ‘convenience and excitement’ produced the commercialism of the 20th century. The 1930s Great Depression challenged this paradigm. The interventionism of JM Keynes saved the Western world, yet to be challenged again during the second decade (the Great Recession) and third decade (COVID-19) of the 21st century.

This may be the deeper significance of the COVID-19 pandemic. Love and compassion. Expecting that vaccination will solve all problems, is like thinking we can escape the implications of the pandemic “without missing a goose step.”

Continue wanting to resolve the tension between freedom and inequality as a convergent problem accepts that economic acceleration can only be achieved through greater inequality (as all previous periods of economic acceleration have witnessed – T Piketty, Capital in the Twenty-First Century, 2014). This time – the 21st century – is different.

The world can only be saved by stop ‘pretending fair is foul and foul is fair.’ While embracing all that has gone before, systemically, it is time to transcend to the higher values of life, preventing further destabilising challenges. The SA economy is very exposed to the attending risks.