Urgency needed in fixing problems that fed into recession
Just as it did this week, Stats SA shocked the market in June 2017 with the news that the economy was in recession. A year later, that recession disappeared thanks to a routine revision that showed one of the two negative quarters had in fact been a slight positive. This time, we will not be so lucky. This recession is much deeper, with contractions of 2.6% in the first quarter of this year and 0.7% in the second quarter.
The first-quarter numbers have already been revised, for the worse. And the world is much more unfriendly to emerging markets such as SA now than it was then. The Rword could hardly have come at a worse time, and the danger is that it feeds into a vicious cycle in which investors shun SA even more than they have already, putting more pressure on the rand, raising the spectre of interest rate hikes, and further undermining SA’s growth prospects and its public finances.
The only silver lining, as Reserve Bank deputy governor Kuben Naidoo argued when he addressed Sanlam’s 100th birthday party this week, is that the negative growth might “spur urgency among all South Africans to sit down and negotiate a faster growth path that is able to be more inclusive”.
Perhaps it was the Ramaphoria, but in retrospect it’s quite odd that so few economists predicted that the second quarter would be negative, even though few thought it would be particularly positive. There’s always the potential for surprises though: economists tend to rely on “high frequency” monthly data on manufacturing, mining, retail and the like for their forecasts, but such data is available for only about 40% of final GDP. That makes it tricky to forecast what will happen in the services sector — which, unusually, was in the red for a second quarter — as well as in agriculture, the tiny sector that has been the huge swing factor in the GDP numbers over the past three years. Coming off the high base of last year’s bumper crops, agriculture was bound to show some negatives this year, and weak investment in the sector on uncertainty about land-reform policy in recent years can’t have helped.
The big drags on second-quarter growth were agriculture, transport, trade and government, and one of the many disturbing aspects of the numbers is that these include some of the most employment-intensive sectors: trade accounts for 15% of GDP but almost 20% of employment, Stats SA estimates, while agriculture is 4% of GDP but 5.2% of jobs.
The quarter-on-quarter numbers are the ones everyone tends to highlight but a better guide to the fullyear trend is the year-on-year comparison, which is also pretty bleak this time. The economy was up just 0.6% for the first half of this year compared with the first half of last year, suggesting that unless growth shoots the lights out in the second half of the year we will come in well below 1% for the year, bringing the average for the past five years to just over 1%.
We tend to look to cyclical and sectoral factors to explain the economic paralysis of the past six to seven years, but underlying it is a more fundamental set of factors that Naidoo highlighted this week: the systematic weakening of institutions, the significant corruption and weakening of state capacity, economic policy paralysis, lack of a national vision and the breakdown in social cohesion.
The question is what happens now, and while the economists work on downgrading their forecasts, SA’s political leaders seem still to believe they can talk us out of recession by promising, again, to reform the economy. Whether President Cyril Ramaphosa has the political capital to do what’s required is unclear. But this week’s shock numbers make it clear that if he is trying to play the long game and wait until after next year’s election to consolidate his power base before making the tough economic decisions, he may find he doesn’t have much of an economy left.