South Africa has been rocked by news that it has slipped into a recession after its gross domestic product (GDP) declined 0.7% during the first quarter of 2017 after contracting by 0.3% in the fourth quarter of 2016. Jannie Rossouw explains what it means.
What is a technical recession?
It’s when an economy suffers two consecutive quarters of negative economic performance. It refers to shrinking economic output, sometimes also known as negative economic growth or economic decline.
In short, it implies that the economic activity of a country is declining. This is never a good thing. In South Africa’s case it’s particularly serious because the country needs strong economic growth to make inroads into unemployment, which currently stands at more than 27%.
South Africa desperately needs a strong economy for other reasons too. The first is that the living standards of its citizens can’t improve without economic growth. The second is that the economy needs to grow for the government to be able to increase revenue to meet its growing social welfare budget.
There are other ways to describe a recession, although the technical definition is one that’s generally accepted. Other definitions include “an economy performing below potential” or “an increase in the output gap”. As an aside, it’s interesting to note that there’s a technical definition for a recession, but no agreed definition for a depression (as in Great Depression of the 1930s).
South Africa’s economy showed marginal positive growth for 2016, although it then contracted in the fourth quarter of the year. With similar contraction in the first quarter of 2017, the country entered a technical recession.
If the economy shows positive growth for the remaining three quarters of this year, South Africa will avert a recession for the calendar year 2017.
What caused it?
Economic activity contracted over a wide range of sectors, including construction, manufacturing and transport. Only mining and agriculture made a positive contribution to output growth. All other sectors contracted.
This reflects subdued demand throughout the South African economy. The data on the first quarter confirms what many small and medium business owners have been saying since the beginning of 2017 – that demand is down and that business conditions are tough.
The important question is whether this recession will continue in the second quarter – April to June, or whether there will be a turn around to economic growth.
Who’s to blame?
It’s difficult to say who is to blame. But it must be noted that recessions are rare events, as policies are generally aimed at economic growth. This is the second recession experienced in the post 1994 South Africa.
Rapid economic growth depends on investment, which in turn is dependent on confidence and positive expectations of the country’s future. President Jacob Zuma’s administration doesn’t instil confidence. This partly explains subdued investment. The recent credit risk downgrades into sub-investment grade has made South Africa a less attractive investment destination.
The lack of confidence is also reflected in suppressed demand, which in turn results in contractions in economic output.
How do we get out of it?
Investment is required to get South Africa out of its depressed economic conditions. Investment will boost demand in the economy, with positive spill-over effects into a number of sectors.
Naturally restoring South Africa’s credit risk rating to investment grade would help boost investment. A better credit rating would reduce the risk of investing in the country.
The upcoming credit rating decision from global credit rating agency Moodys’ is going to be a critical moment. This after two big rating agencies Fitch Ratings and Standard & Poors downgraded some of South Africa’s instruments into sub-investment grade. A downgrade from Moodys’ will trigger massive capital flights which will exert further pressure on the economy.
What company are we keeping? Are other countries in the same boat at the moment?
South Africa is joining a growing list of countries which have slipped into technical recessions. These include Ecuador, Equatorial Guinea and Venezuela. It’s important to remember that a country’s status can change from quarter to quarter depending on its growth rate. This means that an assessment of economic growth or recession status needs to be made based on the most recent data.