TOPIC 3 (Continued)
What you really need to know to optimise your operation
It’s particularly sensitive to macroeconomic inconsistencies
As a demand-driven industry, road freight is extremely sensitive to both positive and negative variations in the macroeconomic climate as these events can severely impact on the effectiveness of their short and medium term budget forecasts.
Wonder if Columbus had any idea what America would be like today when he set off on his “New World” adventure all those years ago? Well whatever motivated him to change the destiny of modern economics, it could not possibly have been anything like he imagined. Sure, it was guesswork and to be honest, it hasn’t changed a bit from back then – it’s still a lot of guesswork.
This analogy amply illustrates the total uncertainty of present-day business forecasting, especially in the road freight industry. To be honest, forecasting is sheer conjecture, leading to wealth or disastrous consequences, irrespective of positive previous investment experiences. This raises the question: What stars will guide you in setting next year’s budget and which co-ordinates will lead your best endeavours to achieve acceptable results?
As we have said many times before, road freight is a demand-driven industry and relies entirely on clients’ freight service calls for business. However, despite the guess work, experience is possibly the greatest advantage in forecasting but can easily mislead you given the current domestic and global economic turbulence.
Possibly one of the best guides in forecasting is to understand the most prominent macroeconomic influences likely to affect, not only your business, but also the SARB and Rating Agencies influencing the country’s economy. Right now, these are very bleak, so we have chosen to view them from a freight-demand perspective.
Given the precarious position of State-Owned Enterprises (SOEs) these can also have a devastating impact on SA’s 2020 trading results, given that Political and Rating Agencies hold the batten in this regard. Mind you, even in the direst economic circumstances, some businesses thrive but not enough to correct the situation and it is difficult to make any calls right now which way the South African economy is headed. To get a better perspective on all this let’s look at the basics.
Basic macroeconomic concepts
Macroeconomics encompasses a variety of concepts and variables, but there are three central topics for macroeconomic research. Macroeconomic theories usually relate the phenomena of output, unemployment, and inflation. Outside of macroeconomic theory, these topics are also important to all economic agents (Carriers and Shippers) including workers, consumers, and producers.
Output and Income
National output is the total amount of everything a country produces per given period. Everything that is produced and sold generates an equal amount of income. The total output of the economy is measured by the GDP per person. The output and income are usually considered equivalent and the two terms are often used interchangeably output changes into income. Output can be measured or it can be viewed from the production side and measured as the total value of final goods and services or the sum of all value added in the economy.
Economists interested in the long-run increases in output study economic growth. Advances in technology, accumulation of machinery and other capital, and better education and human capital are all factors that lead to increase economic output over time. However, output does not always increase consistently over time. Business cycles can cause short-term drops in output. Economists look for macroeconomic policies that prevent economies from slipping into recessions and that lead to faster long-term growth.
The amount of unemployment in an economy is measured by the unemployment rate, i.e. the percentage of workers without jobs in the labour force. The unemployment rate in the labour force only includes workers actively looking for jobs. (currently in the order of 29,5% in SA). People who are retired, pursuing education, or discouraged from seeking work by a lack of job prospects are excluded. Unemployment can be generally broken down into several types that are related to different causes.
Classical unemployment theory suggests that unemployment occurs when wages are too high for employers to be willing to hire more workers. Other more modern economic theories suggest that increased wages decrease unemployment by creating more consumer demand. According to these more recent theories, unemployment results from reduced demand for the goods and services produced through labour and suggest that only in markets where profit margins are very low, and in which the market will not bear a price increase of product or service, will higher wages result in unemployment.
Consistent with classical unemployment theory, frictional unemployment occurs when appropriate job vacancies exist for a worker, but the length of time needed to search for and find the job leads to a period of unemployment.
Structural unemployment covers a variety of possible causes of unemployment including a mismatch between workers' skills and the skills required for open jobs. Large amounts of structural unemployment commonly occur when an economy shifts to focus on new industries and workers find their previous set of skills are no longer in demand. Structural unemployment is different to frictional unemployment, but both reflect the problem of matching workers with job vacancies, but structural unemployment also covers the time needed to acquire new skills in addition to the short-term search process.
While some types of unemployment may occur regardless of the condition of the economy, Cyclical unemployment occurs when growth stagnates. Okun's law represents the empirical relationship between unemployment and economic growth. The original version of Okun's law states that a 3% increase in output would lead to a 1% decrease in unemployment.
Macroeconomic policy is usually implemented through two sets of tools: fiscal and monetary policy. Both forms of policy are used to stabilize the economy, which can mean boosting the economy to the level of GDP consistent with full employment. Macroeconomic policy focuses on limiting the effects of the business cycle to achieve the economic goals of price stability, full employment, and growth.
Central banks implement monetary policy by controlling the money supply through several mechanisms. Typically, central banks action this by issuing money to buy bonds (or other assets), which boosts the supply of money and lowers interest rates, or, in the case of contractionary monetary policy, banks sell bonds and take money out of circulation. Usually policy is not implemented by directly targeting the supply of money.
Central banks (SARB) continuously shift the money supply to maintain a targeted fixed interest rate. Some of them allow the interest rate to fluctuate and focus on targeting inflation rates instead. Central banks generally try to achieve high output without letting loose monetary policy that create large amounts of inflation.
Conventional monetary policy can be ineffective in situations such as a liquidity trap. When interest rates and inflation are near zero, the central bank cannot loosen monetary policy through conventional means.