What you need to know about a recession

Johannesburg – Now that the South African economy has entered into a technical recession, consumers may have to tighten their belts amid uncertainty, says an expert.

On Tuesday, the GDP growth statistics for the first quarter of 2017 revealed that the economy had shrunk 0.7%. This followed the contraction of 0.3% in 2016.

READ: SA enters recession as GDP contracts for a consecutive quarter

A technical recession is defined as two consecutive quarters of shrinking economic activity or declining economic activity. In light of the economy declining in the fourth quarter of 2016 and the first quarter of 2017, it is in recession, said Professor Jannie Rossouw, head of the School of Economics and Business Science at Wits University.

Given that the population grows at 1% per year, while the economy is shrinking, it means that everyone will essentially get poorer, explained Rossouw.

“Business conditions will worsen because there is less money doing the rounds.” Rossouw added that conditions could get worse and recessionary conditions could continue for more quarters. To change this, investment has to pick up again and this lies with improving confidence levels.

“Confidence will not be restored under the current Zuma government. We need to start thinking of a post-Zuma government if we want to restore confidence in the country,” he said.

Rossouw explained that it could take two to three years for a country to remain in recession. “It will be difficult to predict how soon confidence recovers, and how soon investment recovers. It can take a long period of time.”

At the moment South Africans should rein in their consumption, said Rossouw. “This is not the time to enter into new debt commitments, this is a time to pay off debt.” Rossouw added that South Africans should build up reserves.

Stuck economy

Chief economist at Stanlib, Kevin Lings explained with less economic activity means stores are selling less across most sectors of the economy. The pressure on businesses will be intensified. Lings said it is important to consider the reaction to this situation.

Businesses usually first respond by cutting costs, this could have an impact on staff. If jobs are cut, people will have less money. That means they will spend less and the economy will contract even more. Businesses will then try and cut more costs and the cycle continues, he explained.

A benefit would be that businesses will not raise prices in an attempt to keep consumers, but the overall effect is negative, he said.

Another option is to have government step in through the fiscal and monetary policy.

Government could cut taxes, however government recently raised taxes so that is not a likely option for South Africa, explained Lings. “The government needs more tax revenue, it is not in a position to cut tax.”

Government could spend more on consumption, but given the fiscal consolidation path being taken, government does not have the financial capacity to spend more money.

During the 2009 recession government responded by spending more. “In 2009 government debt was 26% of GDP, very low… the difference now is that government is not in the position to spend the same amount of money again because debt levels since 2009 have doubled to 50% of GDP,” he said.

The Reserve Bank could consider cutting the interest rate. However, the Reserve Bank does not have the scope to cut rates dramatically, explained Lings. If the Reserve Bank cuts rates, it may be by half a percent, but that is not enough to lift the economy. “The economy is now stuck.”

The low growth has come about as a result of low confidence, and that should be urgently addressed as the country does not have other short-term options to consider, he said.

Green shoots

Lings explained that the recovery in the agricultural sector with growth of 22.2% in the quarter and in mining (12.8%) shows that there is still some growth. “The problem is these two industries are not big enough to lift the entire economy,” he said.

“There are some positives, it’s not like there are no positives. Those positives are important, they are just not enough right now.”

Johann Els, senior economist at Old Mutual Investment Group said that the recession indicates that two rate cuts could be possible before year end.

Considering spending weakness, the South African Reserve Bank (SARB) may see the need to cut rates. This is in addition to other factors such as declining inflation which is heading for 4.8% for July, a stronger rand and an improving current account deficit, explained Els.

“Should the SARB continue on their current path of holding interest rates, they will be making a serious policy error,” he said.  “We believe that that they will need to cut rates by July or September.”

Treasury also acknowledged green shoots in the economy.  These being improving global growth, stabilising commodity prices, more favourable climate conditions, reliable electricity supply, and  less volatile labour relations .

In a statement Treasury indicated that Finance Minister Malusi Gigaba would be meeting with business leaders to find a way to achieve inclusive economic growth.

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