Recession again
- Jannie Rossouw
The country's economic activity is declining and South Africa is in a technical recession. Here's what it means:
South Africa has been rocked by news that it has slipped into a after its gross domestic product (GDP) declined 0.7% during the first quarter of 2017 after contracting by 0.3% in the fourth quarter of 2016. Jannie Rossouw explains what it means.
What is a technical recession?
It鈥檚 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 that the economic activity of a country is declining. This is never a good thing. In South Africa鈥檚 case it鈥檚 particularly serious because the country needs strong economic growth to make inroads into , 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鈥檛 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 growing .
There are other ways to describe a recession, although the technical definition is one that鈥檚 generally accepted. Other definitions include 鈥渁n economy performing below potential鈥 or 鈥渁n increase in the output gap鈥. As an aside, it鈥檚 interesting to note that there鈥檚 a technical definition for a recession, but no agreed definition for a depression (as in of the 1930s).
South Africa鈥檚 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.
What caused it?
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. All other sectors contracted.
This reflects subdued demand throughout the South 第一吃瓜网 economy. The data on the first quarter confirms what many small and medium business owners have been saying since the beginning of 2017 鈥 that and that business conditions are tough.
The important question is whether this recession will continue in the second quarter 鈥 April to June, or whether there will be a turn around to economic growth.
Who鈥檚 to blame?
It鈥檚 difficult to say who is to blame. But it must be noted that recessions are rare events, as policies are generally aimed at economic growth. This is the second recession experienced in the post 1994 South Africa.
Rapid economic growth depends on investment, which in turn is dependent on confidence and positive expectations of the country鈥檚 future. President Jacob Zuma鈥檚 administration doesn鈥檛 instil confidence. This partly explains subdued investment. The recent into sub-investment grade has made South Africa a less attractive investment destination.
The lack of confidence is also reflected in suppressed demand, which in turn results in contractions in economic output.
How do we get out of it?
Investment is required to get South Africa out of its depressed economic conditions. Investment will boost demand in the economy, with positive spill-over effects into a number of sectors.
Naturally restoring South Africa鈥檚 credit risk rating to investment grade would help boost investment. A better credit rating would reduce the risk of investing in the country.
The credit rating decision from global credit rating agency Moodys鈥 is going to be a critical moment. This after two big rating agencies Fitch Ratings and Standard & Poors downgraded some of South Africa鈥檚 instruments into sub-investment grade. A downgrade from Moodys鈥 will trigger massive capital flights which will exert further pressure on the economy.
What company are we keeping? Are other countries in the same boat at the moment?
South Africa is joining a growing list of countries which have slipped into technical recessions. These include Ecuador, Equatorial Guinea and Venezuela. It鈥檚 important to remember that a country鈥檚 status can change from quarter to quarter depending on its growth rate. This means that an assessment of economic growth or recession status needs to be made based on the most recent data.
, Head of School of Economic & Business Sciences, . This article was originally published on . Read the .