Recession – worse still to come

The news that South Africa’s economy has slipped into a technical recession in the first quarter of 2017 is likely to have negative knock-on consequences for consumers.

The latest gross domestic product (GDP) data released by Stats SA on Tuesday showed that the South African economy declined by 0.7% in the first quarter of 2017, having declined marginally in the last quarter of 2016.

In economic terms, a technical recession is described as two consecutive quarters of economic decline.

The rand reacted immediately to the report, falling sharply against the major currencies. By 13h10, the rand traded at the following levels:

  • Dollar/Rand – 1.23% weaker at R12.86
  • Pound/Rand – 1.19% weaker at R16.56
  • Euro/Rand – 1.06% weaker at R14.46

And according to Neil Roets, CEO of debt management firm Debt Rescue, it is highly likely that ratings agency Moody’s will downgrade South Africa to junk status. The ratings agency is expected to make its announcement on South Africa’s credit rating soon

Roets said that the moment Moody’s downgraded the country, there is likely to be increases in interest rates on everything from unsecured loans to mortgage repayments.

He said what is particularly concerning is that the figure for so-called broad definition unemployment had risen from 35.6% in the last quarter of 2016 to 36.4% in the first quarter of this year.

“This means that well over one third of the economically active population who want to work can’t get jobs. One consequence will be that they cannot pay their bills which may very well drive them into the arms of money lenders who charge extortionately high interest rates.”

The debt expert pointed out that more than half of economically active consumers owed three months or more on their outstanding debt.

“We’ve become somewhat punch-drunk with the two junk downgrades that we’ve had from S&P and Fitch with government bending over backwards to reassure us that it is not a big deal.

“Being officially in a recession is a big deal and unless we can somehow blow some life into our very stagnant economy, consumers are in for a very rough ride,” Roets said.

He pointed out that an additional major problem waiting down the line is power utility Eskom seeking a 19.9% increase in the electricity tariff from Nersa.

“Electricity consumers who get their supply from municipalities will pay considerably more if Eskom is granted this increase because councils place a premium on the Eskom rate to fund their activities,” Roets said.

“As South Africans we have to accept the fact that times are hard and they are most likely going to get harder. Ratcheting up more debt is not the answer because sooner or later it will catch up with you. It is better to tighten belts now and adjust your lifestyle to suit your income however unpleasant that may be in the short term,” he said.

Debt Rescue reported a substantial increase in the number of clients it is assisting to get under debt review.

“Wages and salaries are not keeping pace with the increase in cost of virtually all goods and services. When we do an audit of new clients who come for debt counselling, it is evident that many did not want to give up luxuries like DSTV, a second motor vehicle and holidays at the coast,” Roets said.

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