Tony Twine
Data published by Statistics South Africa (SSA), which effectively wrote the economic recession we thought we were living through out of the history books, appears to have been accepted by analysts, while astounding the man in the street. Is it simply smoke and mirrors, or something more sinister along revisionist lines?
The definition of an economic recession is two or more quarters of negative growth in the gross domestic product (GDP)of a country. Data published in March indicated South Africa’s GDP had declined by 2,9% and 0,3% during the third and fourth quarters of 1998, sufficient to call it a recession. Economists had expected negative growth in the first quarter of this year. But now the data indicates that the GDP grew positively during the fourth and first quarters.
The revision comes from a combination of two of three major changes in the historic data introduced by SSA. The change which does not really count is the re-basing of the GDP deflator, which converts nominal prices to constant ones to give an inflation-free measure of growth. Far more important are the conversion of standards and the inclusion of data from new and/or rapidly developing sub- sectors of the economy.
The GDP data published recently represents the total value added by all sectors of the economy, which should not be confused with the turnover of those sectors. This is the sum of rewards paid to the four factors of production: land, labour, capital and entrepreneurship.
It is easy to imagine the complexity of trying to measure or estimate the size of the total value added. Complexities become impossibilities when economic activity becomes almost covert, as in the informal sector. The economic output of taxi drivers, vendors, accountants, and engineers working for their own account can go unnoticed. Only when the dents they cause in the formal sector data can be filled with reliable information can the undercounting of economic activity be rectified. Allowance for such activities has boosted the new estimates for GDP in South Africa.
The undercounting of the economic activity prior to the latest release becomes even more obvious when you add to the bigger estimates for informal-sector activities a new evaluation of the rapid growth of sectors like private hospitals and cellular telecommunications, which the previous data assembly model did not keep up with since the last data overhaul was in 1993. Not only the overhaul level needed adjustment, but the previous picture of the growth of the economic output could have been faulty and misleading.
Economists measure GDP from two different directions. Aproduction measurement, in which the contributions of the factors of production are aggregated, is calculated by SSA. The opposite side of the coin, namely the quantity of money spent on that production, by locals or foreigners, plus spending on imported goods, is calculated by the Reserve Bank. Their measure of GDP was published on June 29, and coincides with the newly defined measures published by SSA.
Because the production measure of the GDP is bigger than it was, so is the measure of expenditure. Many spending sub-aggregates have changed relative position compared to the old method of computation. Household spending during 1998 now accounts for 62,8% of total domestic spending on final goods and services, compared to 61,8% under the previous measure. Within household spending, consumption of food, beverages and tobacco has lost share from 36,3% to 31,3%. Communication and transport have gained share from 6,3% to 8,5%.
Completing the loop back to the 2,6% per annum growth rate for the GDP which replaced the previous measurement system’s growth rate of 2,2% per annum, we find that household spending has grown by 3,6% over the five years ending 1998, instead of the old system’s 2,9%. Government consumption growth has been downrated to 0,9% per annum from the previous 3,7%. Fixed investment is largely unchanged at 7,3% per annum in real terms, compared to 7,5%.
No, there are no smoke, mirrors, cloaks and daggers. There is simply a newer, substantially improved method of measuring economic activity, and South Africa is among the leaders in implementing the international System of National Accounts 1993.