Edward West, The Witness
South Africa unexpectedly entered a recession on Tuesday, with a 0,7% quarterly contraction in GDP in the first three months of 2017.
When an economy goes into recession, businesses — local and foreign — become reluctant to invest, unemployment increases and those with jobs are unable to get a raise. Consumption spending falls.
FNB senior economic analyst Jason Muscat said the contraction was “significantly worse than our already bearish expectations of zero percent growth”.
Pietermaritzburg Chamber of Business CEO Melanie Veness said the recession is not unexpected given the current political turmoil and economic instability. The rating agencies’ decision to downgrade South Africa was indicative of their expectations.
“We’ve become somewhat punch-drunk with the two junk downgrades … with government bending over backwards to reassure us that it is not a big deal,” she said.
“Being 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,” said Debt Rescue CEO Neil Roets.
The recession is also a reflection of weak consumer and business confidence.
“This weak growth environment means less economic activity, less tax generation and collection and further pressure on government revenue and finance,” said Citadel chief economist Maarten Ackerman.
“While the coming quarters do not seem to be hinting at more positive outcomes on the horizon, we believe collective leadership, between businesses, government, labour and civil society with a view to map a runway … will stand the country in good stead. In the meantime, we remain prepared for a bumpy ride,” said Tandisizwe Mahlutshana, an executive at PPS Investments.
The GDP data shows that the biggest declines were in the trade sector, which contracted -5,9%, and manufacturing (-3,7%).
An indication of how the consumer is struggling is gained from GDP data which shows that people spent significantly less in the first three months: -12,7% on clothing, -8,5% on recreation and -8,6% on restaurants and hotels.
Household consumption declined 2,3% with spend of food and non-alcoholic beverages, clothing and footware and transport the major contributors to negative growth.
The extent of contractions in finance, real-estate and business services and government also surprised, but reflect just how weak domestic demand and investment is.
“Our concern is the numbers are backward looking, and don’t reflect the confidence shock we expect post the cabinet reshuffle and credit downgrades,” Muscat said.
The first quarter contraction follows the GDP decline of 0,3% in the fourth quarter of 2016. In 2016, GDP growth came in at one percent over the previous year.
The agriculture and mining industries were the only sectors that made positive contributions in the first quarter. Agriculture increased growth by 22,2% on drought recovery, and mining grew 12,8%.
The Pietermaritzburg Chamber of Business has some tips for businesses from the experts in times of recession:
• focus on your core business and outsource the rest;
• hedge your bets; and
• look for opportunities in your existing sales channel.