A rumour wobbles an industry

A rumour wobbles an industry

Misinformation and hearsay have the power to influence an economy. Thousands of civil servants resigned from their posts in 2014 and early 2015 in response to rumours about proposed pension reforms. The economic effect was large enough to be seen in recent gross domestic product (GDP) data released by Stats SA.

The government services sector shrank by 0,8% in the first of quarter of 2015, largely as a result of the resignations. The quarter-on-quarter annualised contraction is unusual, as the sector has historically exhibited consistent positive growth. Since 2011, growth within the sector ranged from 1% to just over 5% quarter-on-quarter (annualised). The last quarter-on-quarter contraction experienced by government was in the first quarter of 2004.

The unexpected rise in resignations within the civil service began in May 2014 and peaked in November of the same year, according to the Government Pensions Administration Agency (GPAA) 1. Members of the South African Police Service and teachers in particular resigned in order to withdraw their pension contributions, wrongly believing that from 1 March 2015 government would no longer allow civil servants the option of a cash lump sum.

Despite government’s reassurances that the rumours were false and that pensions were safe, resignations continued into the first quarter of 2015.

What impact did the resignations have on the economy as a whole? If government services had not contracted by 0,8% but had instead expanded by 2,0% (quarter-on-quarter and annualised), the growth rate for the entire economy would have been 1,8% in the first quarter of 2015. This is half a percentage point higher than the actual rate of 1,3%.

Government is the second largest industry in South Africa, superseded only by the finance and business services industry. Government contributes approximately 17% to the country’s value added (in nominal prices), so any changes in economic value provided by government are bound to affect the economy as a whole.

Other results from the latest GDP publication are:

  • Real gross domestic product at market prices increased by 1,3% quarter-on-quarter, seasonally adjusted and annualised.
  • The unadjusted real GDP at market prices increased by 2,1% year-on-year.
  • Nominal GDP estimated at R965 billion for the first quarter of 2015.
  • Compensation of employees within the government sector decreased by 1% in the first quarter of 2015 compared with the fourth quarter of 2014.

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1 Record number resignations hit public sector (click here). http://www.enca.com/south-africa/record-number-resignations-hit-public-sector