Independent strategist Shawn Hagedorn reflects back on a message United States Federal Chair Janet Yellen gave in her testimony to congress, which was swept aside due to the commotion of Brexit. Yellen said that they cannot rule out the possiblility of sustained low growth. Hagedorn says South Africa finds itself in a similar situation, a lack of a growth model built around worries of inadequate demand. And just as the Fed needs to find ways to pressure Congress to remove growth impediments, so South Africa needs to. But the good news is that South Africa’s solution path is far clearer. A great read. – Stuart Lowman
By Shawn Hagedorn*
On the eve of the UK’s historic Brexit vote, Janet Yellen, Chair of the US Federal Reserve Bank, in her testimony to Congress, included something, seemingly innocuous, but exceedingly relevant to SA: “We cannot rule out the possibility expressed by some prominent economists that slow productivity growth seen in recent years will continue into the future.”
Yellen was referring to an economic analysis made by Lawrence Summers who was President Obama’s first choice for Fed Chair. Yellen, also exceptionally qualified, was the more attractive choice politically.
Summers’ analysis and views on rates have differed substantially from Yellen’s. She, along with many others, are now leaning toward accepting his interpretation of broad economic data.
Yellen was acknowledging that the Fed may have been viewing the economy through a fundamentally flawed lens. Summers “secular stagnation” hypothesis is anchored by an unequivocal observation: since the early 1980s, real US interest rates have plummeted from about four percent to zero.
For Summers, today’s below trend US consumer growth is not explained by business cycle factors; that is, it is “secular” not “cyclical”. If Summers is right, new policy responses must be invented.
Summers appears to be winning a tough economic analysis contest in the US. In SA there is no room to doubt that the nation’s economy suffers from inadequate growth in domestic consumption – and the causes are not nebulous. Continuing to ignore this makes matters worse through pursuing policies designed to overcome a different set of challenges.
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In the US, the last decade’s excessive household indebtedness has been largely corrected yet consumer appetites remain subdued. Conversely, SA’s consumer desires are clearly limited by continued over indebtedness. This coupled with a long-term decline in commodity demand points to years of economic stagnation threatening political instability.
It is as if “Team SA” had developed solid answers but the questions were misconceived. This was evident early this year when the country’s delegation of leading CEOs and Finance Ministry officials were told by credit agencies that they hadn’t addressed the core problem: lack of a growth model.
Of course SA should improve its investment climate, yet that amounts to playing for time while the deeper difficulties compound. SA’s future is harshly impaired largely because public and private sector policies have long been contrary to building sustainable demand.
SA’s economic growth is dominated by domestic consumption alongside commodity exporting. Both sectors are now hobbled. Opportunities for increasing manufacturing exports are deteriorating for leading industrial exporter nations and contracting even more sharply for less competitive countries like SA.
Read also: Market turmoil forces Yellen’s hand. Fed ‘delays’ rate hikes, won’t ‘abandon’.
Worrying about whether SA’s credit rating is downgraded or if the economy is headed into recession is to miss the wider picture. Economic prospects for a majority of SA’s households are horrific. The lack of a credible growth model reflects SA’s fundamental economic difficulties having been misdiagnosed.
As Summers has been saying for at least three years, the US economy is mired by weak demand. Thus inadequate investment is a symptom. This is probably true in the US, but it is definitely the case here.
Summers’ sees a persistent drag on US consumer demand extending across business cycles. Until rather recently, China’s emphasis on growing fixed assets had been camouflaging these effects for commodity exporters through bolstering demand for raw materials.
Concerns by credit agencies around SA’s lack of a growth model line up well with Summers’ worries around inadequate demand. Issues surrounding inadequate demand should be more apparent to SA’s policymakers and commentators but, as in the US, prevailing narratives are not easily dispatched.
Transformation challenges and high commodity prices distracted SA decision makers as workers accumulated more debt than skills. Excessive reliance on strong commodity demand compounded perilously.
SA does not lack capacity to mobilise capital for well-reasoned investments. The on-going impediment is that the two main sources of demand, domestic consumer demand and commodity exports, have been crippled. Developing new prospects hinges on policies being adopted to increase SA’s export competitiveness.
Yellen’s choosing a congressional stage to pay homage to Summers’ insights was no accident. Overcoming a long-term shortfall in demand requires policy shifts by legislators, not central bankers.
The Fed Chair needs to find ways to pressure Congress to remove US growth impediments. In SA such challenges are far more extreme. The good news for SA is that the solution path is far clearer. SA must develop much greater capacity to export value-added goods or, more likely, services.
It is unfortunate that Yellen’s entreaties to legislators was lost in the commotion which has followed the UK’s Brexit vote.
- Shawn Hagedorn is an independent strategy adviser. Follow him on Twitter @shawnhagedorn.
