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In 1962, well-known American economist Arthur Okun found that a 1% rise in unemployment figures had an approximate 2% adverse effect on a country’s GDP.
He developed the Misery Index by adding the US unemployment rate to the inflation rate, the result of which should point out just how miserable the country is.
The higher the figure, the more miserable the country.
In the late 2000s, economist Steven Hanke refined this index for use outside the US by adding the country’s prime lending rate to Okun’s calculation and then subtracting the year-on-year per capita GDP growth percentage.
Measuring misery
1. It goes without saying that a country with a higher unemployment rate would be more miserable in general.
2. Inflation indicates how sharply the prices rise on goods that consumers buy and use.
I therefore don’t have to explain why I feel miserable for paying 350% more for electricity today than I did ten years ago.
3. SA personal debt levels as a percentage of personal income still stands at around 72%. The higher the South African Reserve Bank pushes the prime rate, the more miserable we will become.
4. GDP indicates the country’s economic growth as a whole.
The lower this rate, the bigger the struggle the country is facing (mainly influenced by points 1 to 3 above).
Our current year-on-year GDP growth rate is 1.1%, while the African continent has grown by roughly 3.7% over the same period, and the top-ten emerging countries have grown by an average of 3.6%.
Judging by these figures, the reason for South Africa’s miserable situation is clear.
How is South Africa doing?
So how “happy” is South Africa at the moment?
At the end of 2014, we were in 10th position out of 108 countries on the Misery Index.
Even countries like Sudan and Greece performed better.
Unfortunately, the most recent report paints an even grimmer picture as South Africa now finds itself in 7th place out of 95 countries on the Misery Index.
To add to Hanke’s report, I decided to compare the top-ten largest African countries (based on GDP size) and the top-ten emerging countries’ misery figures to one another in order to gain more perspective.
The results delivered no good news. Out of these ten countries, South Africa is the 3rd most miserable, and the main reason for this misery is our high unemployment rate.
South Africa has the highest unemployment rate of all ten countries.
In fact, at 27.6%, our unemployment rate is more than double the average of the remaining nine countries’ unemployment rate (13%).
It is also very interesting to see that when we compare the SA Misery Index to our currency, there is a massive correlation between the weakening of the rand and the weakening of our position on the Misery Index.
What do we do now?
The solution to our misery problem is a two-way street: as an investor, you can either go left or right.
If our position on this index does not improve over the long term, both local and offshore investors would likely be better off finding salvation in other countries.
In order to improve these dire prospects, our government will have to focus intently on two aspects: job creation as a matter of urgency, and pursuing economic growth close to three times our current growth figures.
On the upside, we have identified these problems already, it’s now just a matter of solving them. After all, South Africa loves to compete with the best of the best on the rugby, cricket and soccer fields.
The time has come to do the same on an economic level.
Schalk Louw is a portfolio manager at PSG Wealth.
This article originally appeared in the 23 May edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
