Unemployment rate decline still too insignificant to celebrate – research group

The unemployment rate declined more than expected, but it is still very high and is therefore nothing to celebrate. The latest data from Statistics SA shows the official unemployment rate declined by 0.7 percentage points from 32.6% in the second quarter to 31.9% in the third quarter of the year.

Economic research group, Oxford Economics Africa, says although the decrease in unemployment is encouraging, South Africa’s unemployment rate remains far too high and has not declined sufficiently from the pandemic peak of 35.3% reached at the end of 2021.

“A lack of infrastructure investment over the years has limited economic growth potential, which means the economy is unable to produce enough jobs to satisfy demand. We forecast South Africa’s unemployment rate will hover at current high levels over the medium term,” Jee-A van der Linde, senior economist for the group, says.

The decrease was lower than the group’s expectation of 32.5%.

“Although total employment increased to the highest level since before the Covid-19 pandemic, the unemployment rate remains far too high and has not declined sufficiently from the pandemic peak of 35.3%, which was reached in the fourth quarter of 2021.”

Job losses in manufacturing and mining point to a weak economic environment, while the financial sector manged to employ more people.

“The modest increase of 22 000 jobs added in private households suggests that households are taking strain as the high interest rate environment, together with elevated price inflation, stretches disposable incomes,” Van der Linde says.

“Jobs shed in manufacturing (-50,000), mining (-35,000), transport (-20,000) and utilities (-16,000) highlight the poor performance that productive sectors experienced in the third quarter. Perhaps more concerning is the fact that these trends might portend sluggish growth over the coming quarters.”

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This is why more people were employed

The Nedbank Group Economic Unit said faster job creation reduced the unemployment rate a little further and it is encouraging that the most jobs (287 000) were created in the formal sector, while employment also increased in the informal sector after job losses in the second quarter.

The unit says the decline in the numbers of discouraged workers probably reflects some improvement in power disruptions and lower transport costs, which likely encouraged the discouraged to search more actively for work.

The fact that total employment recovered to the pre-pandemic level, exceeding the fourth quarter of 2019 by 325 000 jobs suggests that the labour market has now normalised from the severe shocks caused by hard lockdown in 2020.

“However, the unemployment rate is still higher than the pre-crisis rate of around 30% because labour force growth continues to outpace job creation and the number of discouraged workers remain large.”

The unit also points out that job losses in mining and manufacturing reflect the sharp deterioration in these sectors’ performance amid the drag stemming from weaker global demand, lower commodity prices, limited electricity supply and worsening logistical challenges.

“While a total of 979 000 jobs (or 6.2%) were created in the third quarter compared to the same period last year, driven mainly by higher employment in finance, community and social services, domestic trade and construction sectors employment is still down by 33.7% or 411 000 jobs for the year to date, compared to the same period in 2022, reflecting slower job creation during the first half of the year when load shedding was more intense,” the unit says.

“The gradual moderation in the unemployment rate, despite the challenging economic environment is encouraging. However, the outlook remains uncertain given the adverse economic landscape. So far, much of the employment recovery has been driven by normalisation in underlying economic activity in those industries heavily affected by the restrictions imposed during the pandemic.

“With employment back to pre-pandemic levels, job creation will now be driven by current and expected economic conditions. The obstacles to faster economic growth remain considerable. While electricity supply improved over the past three months, the underlying shortage have not been eliminated and therefore load shedding continues and power supply remains vulnerable to potential shocks and mishaps,” the unit warns.

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Challenges to stop unemployment

In addition, the unit points out that rail and port bottlenecks have worsened, weighing on domestic trade, mining and manufacturing.

“The cost associated with high levels of crime and corruption also continues to mount. On top of these binding constraints, private firms are increasingly forced to operate in failing municipalities, where the quality of public services are rapidly deteriorating, leaving the private sector with little choice but to seek alternatives.”

Together these constraints reduce output and sales while driving up operating costs, thereby squeezing profits, ultimately forcing companies to cut the costs they can control. The largest cost component for most companies is their labour force and this vicious spiral is already playing out in mining and manufacturing, the two sectors most exposed to the country’s infrastructural constraints and inefficiencies, the unit says

“Currently, cyclical headwinds are amplifying the hit to the economy. Global growth is slowing, with tighter monetary policy weighing on advanced countries while several structural imbalances are hurting growth in China and other developing countries. Domestic demand is also faltering. Households are trimming spending in response to shrinking income, partly due to still elevated inflation and sharply higher interest rates.”

Fixed investment spending is still growing and usually, it is the key driver of job creation. However, the unit points out, the recent acceleration in capital expenditure has been driven mainly by outlays on electrical machinery and equipment due to the need to find alternative electricity sources.

“This type of fixed investment is not necessarily expansionary as it does not increase productive capacity in all industries and therefore does not translate into higher demand for labour.”

The unit also expects that unemployment will remain structurally high over the medium term.

“A fast reduction in the unemployment rate can only be achieved through robust economic growth, which ultimately requires faster implementation of critical structural reforms.”