SA Recession likely underway

2014-06-02 15:37

We noted with some puzzlement this weekend that the newly appointed Finance minister did not think we were headed for recession. Of more interest however was his statement that  "a recession requires two consecutive negative quarters of GDP growth"  

This is interesting, because the SA Reserve Bank (SARB) proclaim recession starts and ends for SA and they, like all other central banks worldwide, apply the National Bureau of Economic Research (NBER) methodology in dating official downswings of the business cycle and this method goes way beyond the general two consecutive quarters of declining GDP. In fact, the 1996-1999 SA recession, a grueling 33 months in duration, only encountered a single negative quarterly GDP print!

As we demonstrated in our previous Voices posting ("SA Recession - here's what you need to know"), and shown by the chart above, two successive declining quarters of GDP has a poor overlap with SARB-defined economic downturns in South Africa. Even if we were to accept the 2-consecutive quarters of negative GDP definition, with April and May behind us, and only June left to rescue the second quarter GDP number, we fail to see how anyone can expect GDP to post a positive print in the 2nd quarter of 2014. Even assuming the mining strike is resolved tomorrow, it would take at least 2-3 months for the mines to retrain staff and retool for production.

Rose-tinted spectacles of the brave, newly-minted Finance minister aside, we have more alarming data out this week that confirms that May 2014 is not going to come galloping to the rescue of the 2nd quarter GDP number.

Firstly new vehicle sales, an excellent barometer of the economy, has remained in negative growth territory for at least 10 months now and is down 9% on May last year. This indicator normally provides a 4-9 month warning of recession (8 months for the last recession) and the warning is now well past its sell-by-date. More worrying (not shown below)  is a 40% plunge in vehicle exports over May last year.

Secondly, a big shock number this week was the Kagiso Purchasing Managers Index™ (PMI™) which fell to a 5-year low of 44.3 index points in May 2014, from 47.4 in April, well into contraction territory. The interesting thing with PMI surveys is they are never revised later on, so we can take this negative print at full face value.

The more data we wait for, the more accurate we can get, but for now our multi-factor recession probability model is pegging the odds of SA recession at an uncomfortable 71%

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