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South Africa in recession: What does this mean for us?

September 7, 2018 • Features, Finance, Top Stories

South Africa has joined a growing list of countries which have slipped into technical recessions.

South Africa has joined a growing list of countries which have slipped into technical recessions.

South Africa has officially entered a technical recession, after Stats SA announced on Tuesday, 4 September, that the country’s real gross domestic product had decreased by 0.7% in the second quarter of the year.

Stats SA data further showed a revised 2,6% contraction in the first quarter. Amid the news, the South African rand fell over 2% to R15,22 against the US dollar.

While the effects of a technical recession, defined by overall GDP contraction, may not be immediately felt by the average consumer, per capita income GDP was a clearer indicator of whether consumers are getting richer or poorer.

South Africa has joined a growing list of countries which have slipped into technical recessions. These include Ecuador, Equatorial Guinea, and Venezuela.

What is a technical recession?

It’s 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’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%.

It’s important to remember that a country’s 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.

How does this affect consumers?

Speaking on how this can affect the consumer, Karl Götte Head of Commercial Enablement at Standard Bank said: “The South African economy contracted by 0.7% in the second quarter, indicating a technical recession. The results show a broad-based weakness in which both the primary and tertiary sectors posted contractions of 4.6 % and 0.6% respectively. Continued declines in field crops and horticultural products continued to weigh down the primary sector, however improvements in the mining sector reduced the adverse impact of the sector. The 0.3% decline in manufacturing (the only secondary sector with a negative contribution) reflected the impact of redirected priorities from households which also saw a 1.9% decline in the trade sector.

“The improvement in the YoY and 6 months comparison still gives hope for improved performance in the second half of the year as an accelerated growth for the remainder of the year is required to achieve positive annual growth. Significant improvements in both business and consumer sentiments in the first quarter did not materialise. Addressing structural constraints to investment and growth remain imperative to boosting business confidence and unlocking activities fundamental to economic growth,” Gotte concluded.

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 growing social welfare budget.

Tsitsi Hatendi-Matika – Head Retail Investment Specialist at Absa Wealth and Investment Management says the numbers confirming the recession might only have come out this week, however, the consumer has been feeling the recession for months.

“Consumer spending was already constrained due to rising unemployment, higher fuel prices, rising inflation, and finally, VAT increases. With rising unemployment and inflation, coupled with a low growth environment, South Africa is experiencing stagflation.”

“For consumers, this is the toughest scenario for an economy. South African inflation bottomed out in March 2018 and is now gradually rising. The rand has depreciated by about twenty-five percent (25%) year-to-date, and oil prices are on the increase, at around seventy-eight dollars ($78) per barrel.”

“For consumers, this means that they will experience higher prices for most goods and services, particularly food and transport. With disposable incomes constrained, consumers can also anticipate lower to no spending on durable goods. Consumers are also likely to reduce their need for long-term credit and this will result in pressure on mortgage lending and vehicle financing. The move to switch to lower-cost products can also be anticipated as consumers move to cheaper alternatives in order to cushion the impact of the recession.

Overall, this will be a difficult period for consumers, and any relief will be appreciated.”

To view the full report, click here.

By Neo Sesinye
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