Recession: Phew! That was close
Economists’ ‘narrow escape’ will not be a comfort to households
● SA may learn this week that it has escaped a technical recession in the second quarter, but that will be scant relief for consumers battered by the plummeting rand and fuel price and VAT hikes.
Economists, speaking ahead of the release of second-quarter GDP figures on Tuesday, said the economy had only “narrowly escaped” recession and that the upcoming data may mask chronic underlying weakness.
A technical recession is two consecutive quarters of a contraction in growth. GDP contracted 2.2% in the first quarter of this year from the fourth quarter of 2017.
The Reserve Bank’s monetary policy committee will consider GDP when it decides on interest rates later this month. The consensus among economists is for the central bank to keep rates unchanged until early next year in spite of rising interest rates in the US that are expected to result in capital outflows from emerging markets such as SA.
A recession amid capital outflows, escalating trade tensions between the US and its major trading partners and the effects of investors dumping risky emerging-market assets following Turkey’s financial crisis would have aggravated the blow to the South African economy.
Azar Jammine, chief economist at Econometrix, said that though the economy was weak, it had not continued to decline as sharply as it had in the first quarter.
He said though sectors such as retail and manufacturing had slipped year on year by June 2018, on a quarter-on-quarter comparison they had improved significantly. “If you add those all together then we’re looking at a positive number for second-quarter GDP growth.”
He added: “The real swing factor is likely to be agriculture.” This was because in the first quarter, agriculture’s quarter-on-quarter annualised growth rate was -24%. Even if agriculture showed little or no improvement the outcome would still reflect positively on the overall quarter-on-quarter GDP figure. “Even if it is zero, it will show a 24% improvement on what was very negative in the first quarter.”
The financial markets may react positively to the GDP number and this could trigger a leap in the rand, he said. “The problem is that would be a misleading indicator of what is really happening in the economy, which is still pretty weak.”
He said the rand was “not that weak” year on year. He added: “One has got to be very careful to assess the extent to which we are going to see inflation and erosion of growth in disposable income.”
Sanisha Packirisamy, an economist at Momentum Investments, said the house view was for a 0.5% quarter-on-quarter seasonally adjusted and annualised growth rate in the second quarter.
“According to our assessment, the South African economy is likely to have narrowly avoided a technical recession, but our forecast indicates that soft growth data extended from the first quarter of the year into the second quarter,” said Packirisamy.
“Poor growth in manufacturing, retail and wholesale sales, utilities and agriculture are likely to be the culprits behind a weaker growth print in the second quarter of the year.”
However, she said, Momentum Investments projected a “healthier growth outlook for the second half of the year” resulting in a full-year estimate of 1.4%. Positive real wage growth and still-elevated consumer confidence would boost household consumption expenditure in the second half of the year, she said.
Packirisamy said a weaker currency would boost export volumes, making SA’s goods and services cheaper to the rest of the globe. But trade tensions have dampened growth in global export volumes in recent months while infrastructure challenges, such as rail constraints, prevented SA from taking full advantage of a weaker currency to boost exports.
Capital Economics said its data suggested that the economy had stagnated in the second quarter. “The economy is clearly failing to gain traction.
And even a marginal fall in output would be enough to tip the economy into a confidence-sapping technical recession. More timely indicators suggest that the economy remained weak in Q3,” it said.
The Absa purchasing managers index, which measures sentiment in the manufacturing industry, was slightly above the neutral mark, but confidence was dealt a blow when US President Donald Trump suggested that he might respond to SA’s land reform plans, the London-based firm said.
Maarten Ackerman, chief economist and advisory partner at Citadel, said he expected GDP growth for the rest of 2018 to remain under pressure, with the 1.5% growth estimated in the February budget a challenge to achieve. Citadel has revised its growth outlook for the year down to 1.2% from 1.8%.
Ackerman said the medium-term budget policy statement in October may indicate that the government has struggled to deliver on the budget numbers promised in February. “Growth has been much lower than expected and tax collection will consequently be much lower than hoped for. Government will also have to make provision for unexpected items such as above-inflation wage increases in the public sector and Eskom, national health insurance, and President Ramaphosa’s stimulation package, placing additional strain on the fiscus.”
In August there were reports that the cabinet had discussed a R43bn stimulus package to boost the economy, but no details have been forthcoming .
Khusela Diko, spokesperson for the Presidency, would not confirm the extent of the stimulus package, but said: “The cabinet lekgotla discussed the stimulus package. The matter went to cabinet for ratification. There are some details that are being finalised. As soon as it is finalised there will be an announcement on the stimulus package.”