No rea­son for sui­cide

But de­pres­sion over re­ces­sion is jus­ti­fied

Finweek English Edition - - Economic Trends & Analysis -

DI­REC­TOR-GEN­ERAL of the Trea­sury Le­setja Kganyago said in re­sponse to the shock re­ces­sion fig­ures that “no one tried to com­mit sui­cide at Trea­sury be­cause of th­ese num­bers”. True, it’s no rea­son for sui­cide – but some de­pres­sion is jus­ti­fied.

Statis­tics SA re­ported a much worse-thanex­pected 6,4% drop in gross do­mes­tic prod­uct (GDP) in the first quar­ter of this year. This fol­lowed a de­cline of 1,8% in the fourth quar­ter of last year. As two con­sec­u­tive quar­ters of neg­a­tive growth is the def­i­ni­tion of a re­ces­sion, SA is now in its first re­ces­sion in 17 years. The fall in GDP was the worst since the third quar­ter of 1984, when GDP shrank 6,5%. (All fig­ures are quar­ter-on-quar­ter, sea­son­ally ad­justed and an­nu­alised growth rates, un­less oth­er­wise stated.)

What th­ese num­bers mean is that South Africans have be­come poorer on a per capita ba­sis. Given a pop­u­la­tion growth rate of about 1,5%, GDP growth of less than that means we are get­ting poorer. An ac­tual de­cline in GDP makes that sit­u­a­tion so much worse. For the man in the street, it means the threat of job losses. Some economists ex­pect 300 000 jobs to be lost in this re­ces­sion.

On a prac­ti­cal level, th­ese fig­ures have se­ri­ous im­pli­ca­tions for the Trea­sury. Though Kganyago didn’t spec­ify, he ac­knowl­edged that the Trea­sury would have to down­grade the GDP fore­casts that the Bud­get is based on. He said SA would do well to record zero growth for the year as a whole – a pro­jec­tion that pri­vate sec­tor economists re­gard as far too op­ti­mistic.

In prac­ti­cal terms, shrink­ing GDP means shrink­ing Gov­ern­ment rev­enue. Given Gov­ern­ment’s mas­sive com­mit­ments to so­cial wel­fare and in­fra­struc­ture spending, this means that Gov­ern­ment will have to bor­row more to meet those com­mit­ments. De­pend­ing on the sever­ity of the depth and du­ra­tion of the re­ces­sion, SA could again find it­self on the brink of a debt trap.

Economists be­lieve SA will record a fur­ther fall in GDP in the sec­ond quar­ter of this year be­fore re­cov­ery sets in dur­ing the sec­ond half of the year. Stan­lib econ­o­mist Kevin Lings says: “The out­look for the next few quar­ters points to on­go­ing weak­ness in the SA econ­omy, with the cur­rent slow­down ex­pected to re­main se­vere in the sec­ond quar­ter of 2009. There is ob­vi­ously a strong re­la­tion­ship be­tween the Re­serve Bank’s lead­ing eco­nomic in­di­ca­tor and SA’s GDP per­for­mance. The lead­ing in­di­ca­tor has been point­ing to a mean­ing­ful slow­down in do­mes­tic eco­nomic ac­tiv­ity for some time and con­tin­ues to sug­gest fur­ther de­clines in the quar­ters ahead.”

Lings ex­pects GDP to slump by around 2,2% this year – a far cry from Kganyago’s 0%. But other economists are less pes­simistic. The Bureau for Eco­nomic Re­search’s (BER) Hugo Pien­aar says his un­of­fi­cial es­ti­mate is of a de­cline of 1,5% for the full year. This fol­lows growth of 3,1% for 2008 as a whole, down from 5,1% in 2007. In the pe­riod 2003- 2007, the SA econ­omy grew by an av­er­age rate of 5% – lead­ing some com­men­ta­tors to think that Gov­ern­ment’s tar­get of 6% an­nual growth by 2010 could be reached.

But now economists say the re­cov­ery, when it comes, will be tepid and will take a long time to warm up. Pien­aar says he ex­pects eco­nomic growth of 2,5% next year, based largely on the ex­pected re­cov­ery in the global econ­omy and the lagged ef­fects of ag­gres­sive in­ter­est rate cuts in SA. The BER’s medium-term growth fore­cast shows growth doesn’t re­turn to 5% in the next five years – 4% is the best we can hope for.

A 2,5% growth rate is, at least, more than the pop­u­la­tion growth rate but is a far cry from the boom times of 2003-2007 and will con­tinue to pose rev­enue prob­lems for the Trea­sury.

One of the strik­ing fea­tures of the GDP break­down is the mas­sive ex­tent to which SA’s ex­port sec­tors have been hard hit. Min­ing out­put fell al­most 33% in the first quar­ter af­ter a mar­ginal in­crease in the fourth quar­ter. Man­u­fac­tur­ing fell by about 22%, the same as the fourth quar­ter’s per­for­mance. If th­ese sec­tors are to re­cover, the global econ­omy will have to re­cover.

In­ter­na­tion­ally, there’s been a scram­ble in the mar­kets to spot the “green shoots of re­cov­ery”. But this has mostly con­sisted of de­clines in the rates of de­cline and im­prove­ments in busi­ness and con­sumer sen­ti­ment from very low lev­els. It’s a ques­tion of spot-

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