It’s now or never, according to the Misery Index

From a young age, we are taught to measure things. If you can measure it, you can manage it, right? Long before my daughters went to school, we used to ask them how much they loved us. They used to stretch their arms as wide as possible and reply: “This much, Daddy.” In the same way we can measure love, so too misery can be measured. By using this Cape winter as example, how can we measure its misery level? For me personally, misery kicks in if I don’t see at least two days’ of sunshine a week, when the wind constantly gushes at 60km/h and the rain feels like it will never end.

Known American economist, Arthur Orkun, discovered in 1962 that a 1% hike in unemployment rate negatively affected US GDP by nearly 2%. He created the Misery Index by simply adding the USA’s unemployment rate to the country’s inflation, which in theory meant that the higher this number, the higher the country’s misery level. In the late 2000s, economist Steven Hanke refined this index for application to countries outside of the USA. He added the country’s prime lending rate to Orkun’s calculation, and subtracted the year-on-year per-capita GDP growth percentage.

Why measure misery?

1. It is obvious that a country experiencing a higher unemployment rate than another would be considered more miserable.

2. Inflation is measured by how sharply prices on consumables and services increase. I don’t need to explain why, as an electricity consumer, I am miserable because electricity prices have more than doubled over the past 10 years.

3. Our South African personal debt levels (as a percentage of personal income) are still around 80%. The higher the Reserve Bank pushes our prime rate, the more miserable we become.

4. GDP growth measures our total economic growth as a country. The lower this number, the more we struggle. (This number is mostly affected by points 1-3 above.)

How does South Africa fare?

So, according to Hanke’s Misery Index, how ‘happy’ are we as a country? In short, very miserable. At the end of 2014 we placed 10th out of 108 countries on the Misery Index, with countries such as Greece and Sudan shockingly faring better.

To make things worse, South Africa is expected to experience the worst misery in 2015, shortly after Venezuela and Argentina, according to world economists’ consensus. With several major companies announcing these past two weeks that large numbers of employees will be retrenched, the rand’s constant weakening putting pressure on inflation, and our first interest rate hike for 2015 in June this year, the warning lights are shining brightly to alert us that these predictions may very well be true.


Graph 1: SA Misery Index vs. rand/US$ (Source: PSG Old Oak & I-Net)

It is also interesting to see a direct correlation between the weakening of this index and the weakening of the rand, when comparing the South African Misery Index to our currency.

Where to from here?

The solution to our misery is a two-way street: as an investor, you either go left or right. If South Africa’s stance does not improve on this index over the long term, it will be in the best interest of both local and international investors to find their salvation in other countries. To improve these prospects, the government would have to focus on two crucial aspects: urgent job creation and pursuing economic growth close to twice its current growth levels.

On the upside, we have already identified the problems; now it’s a matter of fixing them. After all, as South Africans we love to compete with the best of the best on sports fields, whether it be rugby, cricket or soccer. The time has come to compete on an economic level as well.

Table at top of page: Expected Misery Index for 2015 (Source: Bloomberg News Surveys)

The opinions expressed in this document are the opinions of the writer and not necessarily the opinion of PSG. These opinions do not constitute advice. Although the utmost care has been taken in the research and preparation of this document, no responsibility can be taken for actions taken on information in this blog.

Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

1 Comment

  1. So sad !!

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