Get ready for the Zuma recession

2015-11-24 17:24

Stats SA released the latest 3rd quarter GDP numbers today. Apart from the fact that the GDP growth was below 1.1% expectations at 0.7% versus last quarters' -1.3% growth, it was very sobering to see that the Electricity industry (together with Agriculture and Mining) is now in a confirmed full-blown recession, having declined 2 quarters in a row:

This is rather interesting, given the emphatic denials by ESKOM management in their last press briefing that they were not facing a demand crunch pointed out by ourselves here and by Chris Yelland here.

The current SA economic expansion is now just over 72 months old, versus the average expansion duration of 43 months since 1960. Granted, the 2000-2007 expansion lasted for 99 months, the longest since 1960, but this was fueled by a commodities super-boom that is now all but kaput. Just like the government assumed that electricity and water would last forever, they assumed the commodity boom would never end, and failed to reform and diversify our economy over the last 15 years. It seems the only time we ever do anything in SA is when it reaches some form of crises and I fear it will be no different with our economic reform.

The leading economic growth data for SA has been showing a "Zombie economy" since the commodity boom started fading in 2012. This is an economy that is neither dead nor alive - flirting with recession one minute, trying to come up for a breath of air the next, only to sink again shortly after. This is demonstrated by our Leading Economic Growth Index for SA in the chart below, which consists of over 30 data items that reliably predict future SA economic growth 3-6 months out:

Of late, the LBCI has printed a new low for September 2015, last seen in the grueling 2008 Great Recession. What makes this all the more concerning than prior occasions in the last 5 years that the LBCI has dipped below zero (signalling economic contraction ahead) is that this is now being accompanied by the Reserve Bank co-incident  economic index (representing current conditions) curling over:

The leading data growth below zero for some time, accompanied by the coincident data curling over is a very serious warning of us possibly slipping into recession. In fact using statistical models we can infer the probability of us entering recession within the next 6 months, and this probability has been climbing since 2012 and is now well north of 80%

In a past article "Six SA Presidents – how did they fare for SA Inc?" we showed that no president since PW Botha has managed to avoid at least 20% of their tenure in recession. The current administration caught a small section of the tail-end of the 2008/9 recession. This may very well be the Zuma-era recession developing.

As an aside, many people and the local press are of the mistaken belief that we require two negative quarters of GDP growth to be in a recession. This is simply not true. The SA Reserve Bank, like all the other reserve banks worldwide, long ago adopted a business cycle growth approach to measuring economic recessions. Whilst all periods of at least 2 consecutive negative GDP prints have indeed occurred during recession, there are many periods in the grey shaded areas in the above charts that were not accompanied by consecutive negative quarters of GDP growth. So do not let the absence of two consecutive negative GDP prints lull you into complacency.

Also see  recent article : Prepare for 2016 Recession, warns Mike Schussler

This is not all doom and gloom for the informed investor/trader. There are stocks on the JSE that can be regarded as defensive in economic slowdowns and there are also many instruments on the JSE that can act as Rand hedges to protect against typical Rand vulnerability during economic recessions. Also, given that an estimated 60% of JSE earnings now come from offshore, (a huge increase over 2008) it is also probable that the JSE may not react so badly to an economic recession this time around. But renewed caution is most certainly advised.

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