Coffee table economics with Anchor

Anchor’s coffee table economics note by Casey Delport will be distributed intermittently and is a collection of Casey’s opinions on key economic factors and events shaping markets globally and in South Africa (SA). It is essentially Casey’s thoughts and perspectives on the multiple dynamics at play in the global and local economy.

Executive summary

In this week’s edition, we highlight the following:

  • Economic yardsticks: Bridging global economic divides with purchasing power parity (PPP). While gross domestic product (GDP) per capita and PPP indices are helpful economic tools, it is essential to acknowledge their limitations when reading various market analyses or research pieces; these methods should be seen as part of a broader toolkit that also considers other indices to ensure a comprehensive understanding of a nation’s economic landscape.
  • Standing firmly centre stage of this global debt arena is the one and only US. Unsurprisingly, Fitch’s recent decision to downgrade the US has led to a renewed focus on the US government’s debt outlook. According to the IMF, public debt-to-GDP is set to reach a record 134% by 2027. The question over the relative sustainability (or unsustainability) of the US’s overall fiscal position forms its own labyrinth of debate.
  • Mastering the art of interpretation: Navigating the quirks of SA’s latest employment data. South Africa’s (SA) unemployment conundrum remains a puzzle indeed. The headline unemployment rate may have statistically dipped, but it is still at unacceptable levels. Furthermore, it is becoming increasingly difficult to interpret the extent of job growth as reported in the Quarterly Labour Force Survey (QLFS) – which percentage reflects ‘real’ jobs and how much is merely statistical noise/rebalancing? Regardless of the exact data, we maintain that the official headline unemployment numbers do not fully reflect the true extent of the unemployment crisis in the country.

Economic yardsticks: Bridging global economic divides with PPP

There are many ways to measure different economies amongst one another (a game of economic yardsticks if you will), yet assessing nations based on GDP per capita remains one of the most established and reliable techniques. GDP per capita is essentially a widely used metric that calculates the average economic output per individual in a country. It is a fundamental measure that helps us understand a nation’s economic strength relative to its population size. GDP per capita attempts to level the playing field by dividing a country’s economic output by population, effectively giving the average GDP per person. Whilst straight GDP provides an overview of a country’s economic activity, GDP per capita delves deeper, accounting for population differences and enabling more accurate comparisons between nations. One of the strengths of GDP per capita lies in its simplicity and applicability. It allows policymakers, researchers, and citizens to gauge the relative economic well-being of a country’s populace. Nations with higher GDP per capita generally exhibit higher living standards, better access to services, and enhanced infrastructure. The simplicity of this metric also makes it useful for economists and policymakers to communicate levels of economic well-being to the public.

If we compare global economies by the GDP per capita metric, Luxembourg, Ireland, and Norway lead the ranking with more than US$100,000 in GDP per capita. Notably, Luxembourg is a key financial services centre in Europe, Ireland plays headquarters to many multinational corporations, and Norway is one of the largest energy exporters in the region – explaining its relative prosperity. Wealthy countries with smaller populations make up the world’s most affluent ranks. According to the IMF, Luxembourg has slightly more than 600,000 people, which would be a small city in more populous countries. In fact, in the top 10, only the US and Australia have a population of more than 10mn. However, one significant limitation of relying on GDP per capita as a metric is that it does not account for the local currency’s relative strength compared to its exchange rate. The latter is intricately tied to investment flows and demand for the national currency. Moreover, non-tradable goods within a nation, such as local services and education, are disregarded when employing exchange-rate conversions. Additionally, the straight GDP per capita method ignores variations in price levels between countries, as illustrated by the lower cost of fresh vegetables in India compared to Canada.

To solve this problem, economists utilise PPP indices. PPP considers the relative cost of living and inflation rates in different countries, providing a more accurate reflection of the real purchasing power of currencies. This method facilitates equitable comparisons, as it adjusts for differences in price levels, enabling us to compare nominal incomes and the actual value that income can command in different nations. PPP’s significance is particularly evident in international trade analysis. When evaluating trade imbalances and competitiveness, PPP offers a more realistic view of the exchange rates’ impact on trade flows. It helps to reveal whether a currency is overvalued or undervalued and informs decisions on international economic policies. A vital element of these PPP indices is that they remove these price differences and convert them into a common currency to show relative economic prosperity. The Economist’s Big Mac Index and the Wall Street Journal’s Latte Index are famous examples.

Consequently, when comparing nominal vs PPP-adjusted GDP/capita in the Americas, the US takes the lead in nominal and PPP-adjusted per capita GDP data. However, a shift in the new metric places Canada in the third position, with Guyana surpassing it. Within Europe, the customary top contenders in the global top 10 dominate much of the regional rankings. Yet, a notable inclusion is Andorra, securing the tenth spot in Europe’s most prosperous nations by GDP per capita (PPP). Andorra’s success can be attributed to its advantageous status as a free economic zone, characterised by minimal or no taxes, and its role as a thriving tourism hub, contributing a significant 80% to its economic activity. Singapore, Qatar, Macao, the UAE, and Hong Kong claim top spots as Asia’s wealthiest countries on both lists. Qatar and the UAE naturally benefit from oil being a key export of the region, while Singapore and Hong Kong assert themselves as pivotal financial hubs in Asia. The allure of Macao, where gambling is legalised, generates substantial tourism traction.

Regarding Africa and Oceania, the island nations of Seychelles and Mauritius lead the ranks of countries by GDP per capita in both nominal and PPP categories on the African continent, also thanks to their booming tourism industries. Closer to home, as the traditional African economic heavyweight SA also features in this list of Africa’s wealthiest. However, Egypt, Africa’s third-largest economy, only makes the top 10 countries by GDP when adjusted for PPP, otherwise weighed down by its large population. Within Oceania, accounting for purchasing power when evaluating GDP yields minimal impact on the considerable disparity between Australia, New Zealand, and their smaller island counterparts. Nevertheless, certain local economies are significantly stronger when adjusted for PPP. This holds true, particularly for the likes of Fiji, which has a GDP per capita (PPP) three times bigger than its nominal value.

 The bottom line

While GDP per capita and PPP indices are helpful economic tools, it is essential to acknowledge their limitations when reading various market analyses or research pieces. GDP per capita may overlook income distribution disparities within a country, failing to capture the full scope of economic inequalities. Additionally, PPP calculations can be affected by non-traded goods, services, and other factors that may not accurately reflect a country’s economic dynamics. For example, other metrics for a good standard of living, some intangible in economic terms (such as human rights, freedom of expression etc.), are not accounted for.

Nonetheless, GDP per capita and PPP are essential metrics for measuring economies, offering distinct perspectives on economic performance. Together, they help us assess the financial health of nations, inform policy decisions, and provide a basis for meaningful international comparisons. However, these methods should be considered part of a broader toolkit that considers other indices, such as income distribution, poverty rates, and human development indicators, to ensure a comprehensive understanding of a nation’s economic landscape. As the global economic landscape continues to evolve, the judicious use of these tools will enable more informed decision-making and a deeper understanding of the intricate web of economic interactions that shape our world.

Setting the stage for global debt: US takes the spotlight

As of 1Q23, total global debt now stands at c. US$305trn. Over the next five years, it is projected to jump even further – raising concerns about government leverage in a high interest rate and slower growth environment. Best measured by the well-known debt-to-GDP ratio (a critical metric that measures the total debt burden of a country in relation to its economic output), after rising steadily for years, global government debt first ballooned to almost 100% of GDP in 2020. While this ratio has fallen amid an economic rebound and high inflation in 2021 and 2022, it is projected to regain ground and continue climbing. According to the IMF, world government debt is projected to rise to 99.5% of GDP by 2027. Governments often borrow to finance public spending, stimulate economic activity, and invest in infrastructure. While manageable debt levels can contribute to economic development, excessive borrowing can lead to a vicious cycle of rising interest payments and limited fiscal flexibility. Additionally, the cost of servicing debt can divert resources from productive investments, constraining long-term growth prospects.

High debt levels relative to GDP can render a country vulnerable to debt unsustainability. When debt servicing costs become a substantial portion of government expenditure, it leaves less room for essential public services and social programmes. This situation can reduce public confidence, social unrest, and even default risk. Elevated debt levels can also hinder a government’s response to economic shocks and crises. Countries with limited fiscal space may struggle to implement countercyclical policies, such as increased government spending, during downturns. This can exacerbate economic downturns and prolong recovery periods. Furthermore, high public debt levels can lead to higher interest rates, potentially crowding out private-sector borrowing. Standing firmly centre stage of this global debt arena is the one and only US whose public debt-to-GDP (according to the IMF) is set to reach a record 134% by 2027. This sharp rise in interest rates is increasing net debt servicing costs, which stood at US$475bn in 2022. Over the next ten years, net interest costs on US debt are projected to total US$10.6trn.

Excessive debt levels such as these can lead to credit rating downgrades, which often, in turn, increase borrowing costs and reduce investor confidence. Based on this theoretical premise, it is no real surprise (despite the might and global dominance of the US economy) that Fitch recently downgraded the US credit rating. The credit rating agency knocked the US credit rating from the gold-standard AAA to AA+, citing the country’s growing debt burden and the “erosion of governance” (a reference to the recent political standoffs over the debt ceiling). The last time the US received a credit downgrade was in 2011, when S&P sent it to AA+, resulting in no small financial-related chaos. Unsurprisingly, past and present US economic officials were less than impressed with Fitch’s decision. Former Treasury Secretary Larry Summers called it “bizarre and inept” given the current strength of the US economy.

The bottom line

Unsurprisingly, Fitch’s decision to downgrade the US has led to a renewed focus on the US government’s debt outlook. The question over the relative sustainability (or unsustainability) of the US’ overall fiscal position forms its own labyrinth of debate. As the famous US economist Paul Krugman points out, the US cannot have a solvency crisis because, unlike Greece, it prints its own money. However, it is worth bearing in mind that the value of money can still fall – leading to US dollar vulnerability in this case. While moderate debt levels can support economic growth and development, excessive debt poses various challenges, including the risk of debt unsustainability, economic constraints, and crowding out of private investment. Governments (not just the US but across the globe) must carefully manage their debt to ensure long-term fiscal sustainability and maintain the flexibility to respond effectively to economic fluctuations and crises.

Mastering the art of interpretation: Navigating the quirks of SA’s latest employment data.

SA’s unemployment conundrum remains a puzzle indeed. The headline unemployment rate may have statistically dipped, but it is still at unacceptable levels. According to the latest QLFS data from Stats SA, SA’s official unemployment rate took a subtle step back, decreasing by 0.3% from 32.9% in 1Q23 to 32.6% in 2Q23. Expanding the frame to consider discouraged works seekers (thus more reflective of the whole picture), the expanded unemployment rate decreased by 0.3% to 42.1% in 2Q23 vs 42.4% in 1Q23. The total number of employed people in SA now stands at 16.3mn, almost at pre-COVID-19 levels when it stood at 16.4mn. Interestingly, 93,000 folks decided to skip the employment party, and no, it is not because they were feeling down. They are on a different journey- they are officially statistically recorded as not economically active for reasons other than discouragement- which may have skewed these data to an extent.

Overall, employment data from the QLFS survey (a household-based survey of labour market dynamics covering the formal, informal, and agricultural sectors) in recent months has diverged sharply from data reported in the Quarterly Employment Statistics (QES) survey, an enterprise-based labour market survey that only reports on the formal sector – thus gaining a more transparent, more holistic picture of the unemployment picture in SA is becoming increasingly difficult. Furthermore, the QLFS suffered data collection challenges through the COVID-19 pandemic, but these appear to have normalised over the past few quarters. Still, it does continue to make it challenging to interpret the extent of the increase in job growth as reported in the QLFS – which percentage reflects ‘real’ jobs and how much is merely statistical noise/rebalancing? However, with the QLFS data collection rates seemingly back to normal levels, it was unsurprising to see the pace of job growth slowed markedly (the number of employed persons increased by 154,000 in 2Q23, compared to a rise of 258,000 employed persons in 1Q23), which is reflective of the weak underlying growth environment.

The bottom Line

Regardless of the exact data, we maintain that the official headline unemployment numbers do not fully reflect the true extent of the unemployment crisis in the country. How unemployment is measured tends to overlook specific segments of the population, such as discouraged workers who have given up searching for jobs and are, therefore, not considered part of the active labour force. Additionally, the official statistics need to adequately capture informal and underemployed workers. Furthermore, the official unemployment rate might only partially account for the quality of jobs available or the degree of job security. Many individuals in SA are trapped in low-skilled and precarious employment, leading to underemployment and persistent poverty.

Overall, SA’s unemployment problem remains a significant and complex challenge. The country’s unemployment rate has persistently been one of the highest in the world, with a disproportionate impact on the youth population. Tackling this multifaceted problem requires comprehensive and sustainable strategies encompassing education reform, job creation, and inclusive economic growth. Irrespective of the exact details in these data, typically, in the SA economy, material job creation only occurs when GDP growth approaches 3% p.a. Therefore, despite the seemingly resilient nature of the domestic economy to the various structural constraints present, simply put, the economy is currently not growing at an adequate rate to sustainably boost long-term employment prospects for South Africans as a whole.

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