Are we heading towards a recession

This is a discussion of the present state of the South African economy for dummies.

The word ‘recession’ has been bandied about lately by economists and the media when they refer to the South African economy.

What is a recession and are we headed that way?

A recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in the Gross Domestic Product (GDP) for two successive quarters.

What is the GDP?

GDP is a measure of economic activity that excludes imports and exports (in other words, it only covers household consumption, government spending and business investment).

Our GDP has become smaller or has contracted on a quarterly basis in the last two quarters of 2013, and could well have contracted in the first quarter of this year.

This raises the question: is South Africa headed for a recession and what does it mean to the ordinary consumer?

The protracted strike in the platinum sector shoulders a large part of the blame, and even if the strike ends, it could still take up to three months for the platinum mines to return to full operations.

Manufacturing, which is closely linked to mining (there are many companies that manufacture and supply products to mines), also contracted, and while other sectors grew positively in the first quarter, they displayed a weakening trend.

New vehicle sales are usually a good barometer of optimism in the economy, but the sales of new vehicles was down by 9,2% year-on-year last month.

What causes a recession?

Historically, there are a number of factors that cause the economy to contract.

Rising inflation leads to an interest rate shock.

If inflation accelerates and is expected to be persistently above the Reserve Bank’s target, it will hike interest rates. This is the classic cause of a recession – central banks trying to rein in an over-heating economy, and we saw that as well in 2008. Currently, the weak state of consumption spending means it won’t take too many hikes to tip us into recession.

How we got into this mess?

The question of how we got into this mess requires a holistic view. Although analysts blame the current recession on the five-month strike in the platinum belt, there are other contributing factors.

South Africa is the world’s largest platinum producer. Operations at platinum mines were shut down at mines owned by Anglo American Platinum, Impala Platinum Holdings and Lonmin because of the strike. However, mining contributes only 6% to the GDP.

A toxic mix of critical factors has led to our economic decline and these include a credit bubble, excessive government spending, corruption, labour unrest, sluggish overseas markets and a lack of foreign direct investment.

Added to these woes, SA has recently been downgraded.

In practical terms this means that we have received a bad credit rating. If one goes to a bank for a loan, one’s application is judged by certain factors, such as employment status, present financial conditions, previous credit history and ability to pay back the loan.

The rating giant Standard & Poor recently downgraded SA’s sovereign credit rating by a notch. Analysts warned that further downgrades were possible if sluggish economic growth reduced tax collection, making it harder for the country to cut debt and the budget deficit.

Should the ordinary consumers be worried?

They should be. Rising inflation means a rise in the prices of household goods and food. Rising petrol prices due to the struggling rand is a real possibility, a hike in interest rates will put further pressure on already strained household budgets, rising electricity and municipal rates and we are in for a tough year.

  AUTHOR
Fred Boshoff

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