Rocky road ahead as economy slips into recession

Stats SA has revealed that the country’s economy contracted by 0,7% in the first quarter of the year

It represents the second conservative contraction quarter-on-quarter and places the South African economy in a technical recession.

It follows a GDP decline of 0,3% in the fourth quarter of 2016 and overall economic growth of just 0,3% for the year.

“We have officially entered a recession. The last time we entered a recession was 2008-09 when we had three consecutive quarters of negative growth,” said Stats SA deputy Director-General of Economic Statistics Joe de Beer.

“There’s a clear link between the fall in household consumption expenditure and the decline in trade.”

News of the disappointing GDP numbers released on Tuesday had a heavy impact on the rand, with the local currency weakening by over 1% across all major currencies.

There are now growing fears that the weak economic data will only strengthen the case for ratings agency Moody’s to downgrade the country’s sovereign credit rating to junk status.

“The pace of economic growth remains weak and will impact on all the metrics across the board. From a government perspective, this is likely to put further pressure on revenue collections, which are much-needed funds that are crucial to investing in growth enhancing projects,” said Tumisho Grater, an economic strategist at Novare Actuaries and Consultants.

Debt Rescue CEO Neil Roets says consumers should brace themselves for a rocky road ahead.

“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 was quoted saying in a BusinessTech report.

He warned consumers to keep their spending and debt in check as now is not the time to be taking on any additional debt.

The negative growth was predominantly driven by the trade, catering and accommodation industries, which fell by 5,9%, dragging down its contribution to the GDP from R164 billion to R148 billion.

The manufacturing sector also contracted by 3,7%.

“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,” Roets warned.

“It is better to tighten belts now and adjust your lifestyle to suit your income, however unpleasant that may be in the short term.”

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