Economic growth key

South Africa has been rocked by news it has slipped into a recession with its gross domestic product (GDP) declining 0.7% during the first quarter of 2017 after contracting by 0.3% in the fourth quarter of 2016.

Head of the School of Economic and Business Sciences at the University of the Witwatersrand Jannie Rossouw explains that a technical recession is 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 the economic activity of a country is declining.

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 expanding 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.

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.

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.

Rapid economic growth depends on investment, which in turn is dependent on confidence. – TheConversation.com