Technical recession confirmed tomorrow by StatSA?

2016-09-05 08:20

This article speculating on potential recession confirmation, appeared first on SharenetVIEWS.

On Tuesday 6th Sept, Stats SA will release the first estimate for 2nd quarter 2016 GDP. If you recall, the 1st quarter GDP was almost 2% in the negative, leading to speculation of us entering a technical recession defined by two consecutive quarters of negative GDP (as opposed to the more widely accepted business cycle recession which looks at trend growth).

Here is what we know:

Firstly, we can see what folly it is to use two consecutive negative quarters of GDP as our definition of recession since this is a very poor overlap with the officially declared SA Reserve Bank business cycle recessions shown above. Secondly it takes all but the visually impaired to notice our GDP is on a downward spiral since December 2013, the top of the last business cycle expansion.

Forecasting GDP one quarter ahead is a notoriously difficult task, but there are some indicators that have reasonable correlations with GDP and can be used to forecast ahead one quarter. The strongest is Electricity Output by ESKOM:

Visually it is obvious the correlation is strong and statistically the r-squared of 0.61 (measure of correlation) confirms this fact. The steep dip in 2008 is related to the Great Recession in SA.We can calculate the 2nd quarter (2Q) ESKOM print from the June print for electricity output so this is hinting at a low 2Q print for GDP.

In the rest of this article on SharenetVIEWS we examine three other indicators with strong correlations to SA quarterly GDP and show how we combine them all into a 4-factor one-quarter-ahead GDP regression forecast model with a prediction accuracy of 85%, to give us an idea of what to expect from StatsSA tomorrow. The result is sure to surprise many.

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