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Coffee Table Economics with Anchor

Anchor’s Coffee Table Economics note by Casey Sprake will be distributed intermittently. It 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 economies.

Executive summary

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

  • Taxing matters: The global impact of corporate tax rates on economic growth: Corporate tax rates have long been a focal point in economic policy discussions, shaping the behaviour of businesses, influencing investment decisions, and impacting government revenues worldwide. In recent years, the issue of global corporate tax rates has gained heightened attention, driven by increasing globalisation, the digitalisation of the economy, and concerns about tax fairness and competition among jurisdictions.
  • 1Q24 SA GDP set to take a hit from the poor performance in the manufacturing and mining sectors: With the full set of 1Q24 mining and manufacturing data now available, the contribution from both sectors to overall economic activity is set to be negative. This downturn could have far-reaching implications, and collaboration between government, industry stakeholders, and labour unions will be essential to drive meaningful change and revitalise these critical sectors.
  • Counting the cost: SA unemployment increases ahead of crucial May elections. According to the latest Quarterly Labour Force Survey (QLFS) data from Stats SA, SA’s official unemployment rate increased to 32.9% in 1Q24 from 32.1% in 4Q23. As a result, unemployment has risen to the highest level in over a year – an unwelcome statistic for the ruling African National Congress (ANC) ahead of the highly contested national and provincial elections scheduled for 29 May.

Taxing matters: The global impact of corporate tax rates on economic growth

Corporate tax rates have long been a focal point in economic policy discussions, shaping the behaviour of businesses, influencing investment decisions, and impacting government revenues worldwide. In recent years, the issue of global corporate tax rates has gained heightened attention, driven by increasing globalisations, the digitalisation of the economy, and concerns about tax fairness and competition among jurisdictions. The global landscape of corporate taxation is characterised by a complex interplay of factors, including national tax policies, international agreements, and the evolving dynamics of cross-border trade and investment. Discrepancies in corporate tax rates across countries have led to debates about tax competition, profit shifting, and the distributional effects of taxation on businesses and society. As governments grapple with the challenges of economic recovery, sustainable development, and fiscal stability, the question of how to effectively tax corporate profits has become a pressing issue on the global agenda.

In an interconnected world, businesses have the flexibility to operate in multiple countries and can choose locations with favourable tax regimes. Global corporate tax rates influence investment decisions and capital flows across borders. Higher tax rates in one country may prompt companies to relocate operations to jurisdictions with lower tax burdens, leading to capital flight and potentially reducing economic activity in high-tax countries.

Furthermore, global corporate tax rates create competition among countries to attract investment and business activity. Countries often adjust their tax policies to remain competitive and retain or attract multinational corporations. This competition can drive tax reforms and adjustments, impacting the global tax landscape. As such, discrepancies in global corporate tax rates can incentivise profit-shifting and tax-planning strategies by multinational corporations to minimise their tax liabilities. This behaviour can result in tax erosion for governments, leading to revenue losses and challenges in enforcing tax laws.

It is important to remember that corporate taxes are a significant source of revenue for governments worldwide. Global corporate tax rates influence the amount of tax revenue collected by governments, which, in turn, affects their ability to fund public services, infrastructure projects, and social welfare programmes. Fluctuations in global tax rates can impact government budgets and fiscal policies, shaping economic priorities and development strategies. Therefore, balancing global corporate tax policies is essential for promoting sustainable economic development and reducing disparities between countries.

In 1980, the global average corporate tax rate stood at 40.2%, notably higher than today. Over the last several decades, corporate tax rates have declined across every region, with the average now falling to 23.5% as of 2023. As tax rates have declined, US Treasury Secretary Janet Yellen and other prominent policymakers have called for a global minimum corporate tax to prevent multinationals from sheltering profits in tax havens. Interestingly, as things currently stand, countries clustered in Africa and South America typically hold the top tax rates globally. Argentina, with a corporate tax rate of 35%, hiked up its rates from 25% in 2022 as the country was mired in a deepening economic crisis. The country has also been a key supporter of a global minimum tax, suggesting it should be raised as high as 25%. Malta, the sole European nation listed in the top 10 countries with the highest corporate tax rates, boasts one of the highest corporate tax rates – yet its tax system is intricate. While local businesses face a 35% tax rate on profits, international firms can enjoy rates as low as 5% in Malta, supplemented by an additional 10% tax paid in their home country.

Contrasting this with data from 1980 reveals significant shifts in corporate tax landscapes globally. Countries like India, China, and the UK registered corporate tax rates exceeding 50% back then. China’s subsequent economic reforms included pivotal tax reductions, catalysing the growth of its private sector. In the UK, corporate tax rates have plummeted from 52% in 1980 to the current rate of 25%. Similarly, the US witnessed a substantial decline from a 46% corporate tax rate in 1980 to the present day, with the rate having more than halved. Major corporate tax cuts characterised Ronald Reagan’s presidency in the 1980s, slashing rates to 35%, and were further lowered to 21% under the Tax Cuts and Jobs Act of 2017.

The bottom line

For any given country, global corporate tax rates play a crucial role in shaping said country’s economic landscape by influencing investment decisions, revenue generation, innovation, employment levels, and overall economic stability. From a global perspective, corporate tax rates play a crucial role in shaping the world economy by influencing investment decisions, international competition, revenue collection, income distribution, and overall economic growth. Harmonising tax policies and addressing tax challenges in a coordinated manner is essential for promoting fairness, efficiency, and stability in the global tax system. As such, finding the right balance in corporate tax policies is essential for promoting sustainable economic growth and competitiveness in the global marketplace.

1Q24 SA GDP set to take a hit from the poor performance in the manufacturing and mining sectors

In March, SA’s manufacturing production decreased sharply by 6.4% YoY, a significant drop from February’s 4.0% YoY increase and falling short of the anticipated c. 0.8% YoY growth. Compared with the previous month, manufacturing output declined by 2.2% in March, worsening from the 1.0% MoM decrease in February. On a quarterly, seasonally adjusted basis (a key indicator for GDP calculations), the manufacturing sector shrank by 1.0%, which is expected to impact 1Q24 GDP data negatively. Considering the manufacturing data in more detail, the most pronounced decline occurred in the motor vehicles, parts, and accessories sector, which pulled down the headline figure by 2.7 ppts following a steep 25.9%YoY drop. Notably, the parts and accessories segment, which has a significant influence due to its larger weight, plummeted by 33.5% YoY. The combined sectors of basic iron and steel, non-ferrous metal products, metal products, and machinery contributed to the decline by shaving off an additional 1.9%, driven by a 9.0% annual decrease. Additionally, the combined sectors of petroleum, chemical products, rubber, plastic, food and beverages, and textiles, clothing, leather, and footwear sectors subtracted 1.6% from the overall number.

March’s downbeat performance is corroborated by SA’s seasonally adjusted headline Purchasing Managers Index (PMI), which contracted again. The indices for business activity and new sales orders decreased during the month, reflecting continued weakness in demand, as reported by survey participants. Manufacturer confidence also took a hit in 1Q24, with 42% of survey respondents from the latest Bureau of Economic Research (BER) survey reporting a deterioration in business conditions compared to the previous year. However, there is a glimmer of hope as preliminary figures from April’s domestic headline PMI suggest an uptick at the onset of the second quarter. The index rose to 54.0, buoyed by marked improvements in business activity and new sales orders, partly thanks to more than 30 consecutive days without rotational power cuts.

Similar to the March manufacturing data, on the mining side, production also fell significantly in March – down 5.8% YoY following a noteworthy 10.3% YoY rise in February. This result fell well below the consensus forecast of a 2.2% YoY growth. When measured on a seasonally adjusted QoQ basis (the metric used to calculate GDP), mining output decreased by 1.7%. As a result, both the mining and quarrying sectors and the manufacturing sector are expected to impact 1Q24 GDP negatively. Further analysis of the March mining data reveals that the annual decline was widespread, with only four of the twelve mineral categories in the index showing growth on a YoY basis: chromium ore, copper, nickel, and diamonds.

Coal production, accounting for c. 26% of the mining basket, saw a YoY decrease of 9.1%, contributing a negative 2.3% to the overall decline. The price of coal in SA has dropped by over 20% YoY, mainly due to logistical challenges that affect this essential export commodity domestically. Furthermore, manganese ore also negatively impacted the overall reading by 1.0% due to a 12.2% YoY contraction in March. Iron ore and platinum group metals (PGMs) further contributed to the decline, subtracting a combined 1.8% from the headline number. The decrease in iron ore prices, crucial for steel production, is attributed to increased seaborne supply from Australia and Brazil, leading to higher port stocks in China. In April, the World Bank’s Commodity Markets Outlook reported a YoY decrease of over 14.0% in March.

The bottom line

With the full set of 1Q24 mining and manufacturing data now available, the contribution from both sectors to overall economic activity is set to be negative. A major factor contributing to the manufacturing sector’s weakness last year was the substantial electricity supply limitations and other structural constraints, such as logistics and water management challenges. These constraints persist and are expected to restrict the sector’s potential for significant improvement throughout 2024. The SA mining sector continues to face various challenges, including issues with water infrastructure, the poor conditions of roads and railways, and policy uncertainties that hinder optimal operations and export potential. Although progress has been made in certain areas of the economy, these challenges continue to affect the country’s competitive position and deter much-needed foreign investment. Addressing the challenges facing the SA mining and manufacturing sectors will require a multi-faceted approach. This may include improving infrastructure, enhancing regulatory certainty, investing in skills development and innovation, and fostering a conducive business environment. Collaboration between government, industry stakeholders, and labour unions will be essential to drive meaningful change and revitalise these critical sectors.

Counting the cost: SA unemployment increases ahead of crucial May elections

SA faces a significant unemployment problem that continues to pose challenges for the country’s economic and social development. The unemployment rate has remained stubbornly high for many years, with a complex range of factors contributing to the issue. A combination of structural deficiencies, such as a lack of skills, limited access to quality education and training, and inadequate job creation, has resulted in a large portion of the population being unable to find gainful employment. According to the latest QLFS data from Stats SA, SA’s official unemployment rate increased to 32.9% in 1Q24 from 32.1% in 4Q23. As a result, unemployment has risen to the highest level in over a year – an unwelcome statistic for the ruling ANC ahead of the highly contested national and provincial elections scheduled for 29 May. The increase is the second quarter in a row that the official unemployment rate has risen, taking it closer to the record high of above 35% reached in 2021 during the COVID-19 pandemic. On average, joblessness in SA has increased by about 10 ppts in the three decades since the ANC came to power. Most unemployment gains were in the construction and community and social services sectors. Weak consumer demand, frequent power cuts and logistics constraints at SA’s freight-rail system and ports have unsurprisingly taken a toll on companies’ profits and, thus, their ability to generate further meaningful employment opportunities.

The unemployment rate, according to the expanded definition (which includes those discouraged from seeking work and thus more reflective of the actual number of unemployed South Africans), rose further to 41.9% – concerningly high. This points to longer-term, structural issues within the local economy as it is difficult to reincorporate and entice discouraged work seekers back into the labour force. Of further concern is the long-term unemployment rate (i.e., those unemployed for a year or longer), which has steadily increased over the past decade – from 65.5% in 1Q13 to 75.2% in 1Q24. Moreover, SA’s unemployment problem remains particularly acute among the youth, where high levels of unemployment hinder their prospects and exacerbate social inequalities. As such, the youth unemployment rate has risen again to 59.7%. It is worth bearing in mind, however, that employment data from the QLFS survey (a household-based survey of labour market dynamics covering the formal, informal, and agricultural sectors) have diverged sharply in recent months from data reported in the Quarterly Employment Statistics (QES), which is an enterprise-based labour market survey that only reports on the formal sector. Thus, gaining a more transparent and holistic picture of unemployment in SA is becoming increasingly difficult.

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 do not adequately capture informal and underemployed workers. Furthermore, the official unemployment rate might not fully 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. Moreover, in the domestic economy, material job creation has only occurred when GDP growth approaches 3% p.a. Currently, businesses remain under significant pressure from the ongoing effects of loadshedding, which also weighs on jobs and the unemployment data. Thus, the economy is simply not growing at an adequate rate to sustainably boost long-term employment prospects for South Africans. At the end of the day, SA’s unemployment problem is a complex and multifaceted issue that requires sustained and coordinated efforts from all sectors of society to create inclusive and sustainable employment opportunities for all South Africans.

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