Getting through recession unscathed
THE BIG UGLY “R” word has once again reared its head – recession. Statistics South Africa’s latest gross domestic product (GDP) report revealed that the South African economy has recorded two consecutive quarters of negative growth, which indicates a “technical recession”.
While the announcement was made recently, the country had been in a “recession” for six months (quarter (Q) 4 of 2016 and Q1 of 2017). Therefore, the consumer has already been feeling the effects of this recession, and could potentially continue long after positive growth has been achieved.
It has been reported that preliminary data indicates that the next GDP figure could potentially be positive, reminiscent of what we experienced last year.
The GDP figure for Q1-2016 was -1.2 percent, but by Q2-2016, the economy achieved a 3.3 percent GDP increase.
Weathered through
Nonetheless, South Africans have survived several global and local recessions. Since 1960, there have been four global recessions while South Africa has weathered through eight local recessions.
Probably the worst of the recessions observed was the 2008 financial crisis, where it is estimated that close to 900 000 jobs were lost by the South African economy. The country was in a recession for 9 months, which is a much shorter period when compared to other countries, such as Greece, which experienced a recession for 63 consecutive months from 2008 until 2014.
Recovering from a recession varies from region to region. Research by the Federal Reserve Bank of St Louis shows that the US and China grew by 12 percent and 65 percent, respectively, between Q4-2008 and Q4-2014, while the Italian and Greek economies grew and then shrank again, with their total GDP declining by 6 percent and 24 percent, respectively, since the financial crisis started.
This can be forthrightly comprehended as fundamental economic issues vary from one country to the next. Currently, there is an ongoing debate in South Africa which aims to diagnose our impediments to achieving sustainable economic growth.
At a macro level, we have been grappling with policy uncertainty that many pundits argue has led to a “private sector investment strike” – where companies either prefer to keep stockpiles of cash or invest it abroad instead of investing in the local economy.
Recent statistics show that current bank deposits of these companies amount to R725 billion. Only time will tell whether Finance Minister Malusi Gigaba will be able to unlock this potential private sector investment, which could result in much-needed job creation necessary for achieving solid and sustainable economic growth. Time will tell whether Gigaba is more sympathetic to increased government expenditure or fiscal restraint.
Opportunities
At a micro level, there are opportunities for consumers to capitalise on to ride out this tough economic wave. With interest rates remaining unchanged in the previous MPC meeting, the time is now for consumers to exploit their debt situations by paying off outstanding debt faster.
However, there is no telling when either of these situations may change. Another opportunity for consumers is to cut back on discretionary spending and channel that money into savings and investments with the aim of increasing their future potential buying power.
With a myriad of investment options that consumers could use to invest, unit trusts offer a fairly accessible way for the average investor to kick start their investment journey, but this too could be a daunting task with more than 1 400 unit trusts available to South African investors.
Within a multi-management investment structure, selected unit trusts are already combined for investors to create a bespoke investment option diversified across asset classes, regions and investment styles.
One of the advantages of using a multi-manager is that it removes the burden of trawling the unit trust universe, looking for the one best suited to your investment needs. During a recession, it’s even more critical for consumers to resist the temptation of taking on unnecessary debt, limit discretionary spending and instead save more.