Despite the optimism that came along with Ramaphoria (the period immediately after the election of Cyril Ramaphosa as State President) there are worrying signs about the economy, especially after the announcement that South Africa has officially entered a technical recession. The announcement came after Stats SA announced on Tuesday that the country’s real gross domestic product had decreased by 0.7% in the second quarter of the year.
This is bad news for the country as many international markets are looking towards robust emerging markets as key areas of growth. The real questions are why is it happening and what is the implication of this going forward?
Agriculture close to bust
According to a press release by Citadel, there are major challenges in the agricultural sector which is a major contributor to the country’s Gross Domestic Product (GDP).
The release pointed out that the sector declined -29.2% following its previous decline of -24% in the first quarter.
This wasn’t unexpected. However, as agriculture saw a huge boost last year coming off a low base from the drought to increase around 17%, we knew this momentum couldn’t last forever. With time, this base effect will fall away, and the agricultural industry will start to contribute positively again.
If the drag from the agricultural industry were excluded from the figures, weak contributions from other industries would still see GDP growth at a mere 0.1%.
Despite this, it is somewhat positive to see that the mining, construction, electricity and financial industries all contributed positively to the economy over the past quarter as these industries form the growth engines of the economy and hold the most potential for job creation.
Manufacturing sector worries
South Africa’s manufacturing sector is already small by international standards. Any contraction in this sector will have a major effect on the economy.
While manufacturing activity was down 0.3% on a quarter-on-quarter basis (q-o-q), other areas of the secondary sector performed better.
Utilities grew by 2.1% q-o-q and construction expanded by 2.3% q-o-q. The rise in building activity was the first positive q-o-q number since Q4 2016.
The Bureau for Economic Research (BER) previously reported continued and improved activity in the non-residential sector during the quarter, albeit from heavily depressed levels. Nonetheless, the construction industry remains in dire straits.
Declines all around
In the tertiary sector, declines in wholesale and retail activity (-1.9% q-o-q) as well as transport and communication (-4.9% q-o-q) continued to contrast strongly with the recoveries seen in surveyed consumer and business confidence.
The transport and communication sectors were the largest contributors to the overall contraction in economic activity following agriculture. General government services contracted by 0.5% q-o-q under the implementation of a more austere 2018/19 fiscal budget. On a positive note, the finance, real estate and business services industry – the largest sector within the South African economy – expanded by 1.9% q-o-q. Increased activity was also reported by StatsSA for financial intermediation, insurance and real estate services.
The downgrades may be circling
It is worthwhile noting that while there have been no ratings downgrades since November 2017 (when South Africa was downgraded to junk status), the credit ratings agencies have been keeping a close eye on South Africa’s economies for any sign of extreme weakness.
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 several sectors.
President Ramaphosa did secure some investment from China during the recent BRICS Summit. But was it enough?
Credit ratings agencies have a major decision to make in November and they may downgrade South Africa further if they do not see any signs of the economy recovering from the challenges it faced in 2017.
What does this mean for the consumer and will the announcement of the technical recession impact rating agencies’ decision? Wits economics lecturer Lumkile Mondi pointed out in an interview on 702 yesterday morning that going forward, it will be difficult for the state to pay and increase state pensions. This is being driven by an expected downward revision in tax collection from the South African Revenue Service. This means that government will have to borrow more and that tax increases may be on the cards for next year.
“Some people may say that we have been living in a recession type climate for some time now so it won’t make a difference. However, this recession will make a major difference. There is no confidence in the economy from either the consumer or the business sector and there is no confidence in government. This will hurt the economy,” said Mondi.
Job creation is one of the only ways to kick start this economy but when a technical recession is announced it is fairly sure that job creation will be at an ultimate low. How do we fix this? We face an uphill battle.