Johannesburg – Recovering from the recession will first of all require low business and consumer confidence levels to be addressed, according to an analyst.
The latest gross domestic product growth figures, released by Statistics South Africa on Tuesday, show that the economy contracted 0.7% during the quarter. This fell short of market expectations of a 1% expansion.
This follows a contraction of 0.3% reported in the last quarter of 2016. Given the consecutive contraction in growth over the past two quarters, the country has entered a technical recession. The last time the country entered a recession was in 2009, as a result of the global financial crisis.
Stanlib chief economist Kevin Lings said that this recession however was not created by global factors, but rather domestic developments which have negatively impacted investor confidence.
“What is causing this is fundamentally a lack of confidence,” he said. Lings emphasised that this lack of confidence cannot be traced to a single event but by a culmination of events over a number of years. “Households and business over the last few years have systematically lost confidence,” he said.
This includes the electricity outages, strike activity in the platinum and motor sectors, the state capture report released by the Public Protector, the Cabinet reshuffle and the credit ratings downgrade.
The lack in confidence translated into delayed purchase decisions by both households and businesses. This was seen in the 5.9% contraction in the trade industry.
“We have seen a significant delay in purchase decision of households and businesses, which ultimately put the economy into recession.”
Lings explained that this ultimately creates a self-perpetuating cycle of poor economic growth.
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“The solution is to find a way to lift business and household confidence, and a lot of that relates to the political environment,” he said. A more stable economic environment would help improve confidence levels.
“Clearer policies and less fighting within the ruling party, much more clarity on leadership of the ruling party, all of those things are vital to confidence and growth,” said Lings. More clarity will help boost business confidence, he explained.
There is a loss of confidence in the private sector, at a time when the world economy’s performance is improving. “There is some benefit from the world economy but that benefit being more than offset by domestic loss of confidence,” said Lings. “If the world gets better South Africa gets better, we should be doing better than we are doing now.”
Mamello Matikinca, economist at FNB, explained that South Africa is being pulled back by its own-goals. She also pointed out that the private sector “investment strike” should be urgently addressed.
“Companies will be less inclined to invest as long as there is volatility and noise and uncertainty in the political environment,” said Matikinca.
The lack of investment is not due to a resource constraint, but due to a lack of confidence, she said.
Further, the lack of spend by consumers is due to less optimism about the economic outlook. It was expected that the lower inflation and positive food prices would result in more spending, but this was not the case, said Matikinca.
Consumers are making the most of low interest rates to pay off outstanding debt and were taking on precautionary saving given the downturn of the economic environment.
Sanisha Packirisamy, economist at Momentum Investments, explained that pressure on consumer purchases also extended to non-discretionary items such as food, clothing, transport , recreation, alcohol, tobacco and restaurants.
“An overhang of political tensions and a lack of a clear direction on economic policy is likely to suppress domestic demand,” she said.
Growth for the year may just be under 1% due to the low confidence levels, said Packirisamy.
Matikinca projected growth below 0.7% and Lings said Stanlib revised growth down to 0.6% from 0.9%.Read Fin24's top stories trending on Twitter: Fin24’s top stories