SOUTH AFRICA IN TECHNICAL RECESSION AFTER ECONOMY CONTRACTS 0.7 PCT IN Q2 2018

CAPE TOWN– South Africa is in a technical recession after the economy contracted for a second quarter in a row in the second quarter of the year but is likely to exit its technical recession in the third quarter.

Hugo Pineaar, a senio economist at the Bureau of Economic Research (BER), an institute of Stellenbosch University, near here, said Tuesday: “In terms of our forecast, I think that we will exit the recession in the third quarter.”

Gross domestic product (GDP) figures for the second quarter of 2018 showed that the economy slipped into recession. According to data released by Statistics South Africa (Stats SA) earlier Tuesday, the economy shrank by 0.7 per cent quarter-on-quarter following a revised 2.6 per cent contraction in the first quarter of 2018, fulfilling the widely recognized indicator of recession of two (or more) consecutive quarters of negative growth.

Stats SA said earlier Tuesday the 0.7 per cent downturn in the second quarter of 2018 was a result of a fall-off in activity in the agriculture, transport, trade, government and manufacturing industries. Agriculture production fell by 29.2 per cent in the second quarter of 2018, following a 33.6 per cent slump in the first quarter, largely driven by a decline in the production of field crops and horticultural products.

At the release of the data at a media briefing in Pretoria, Stats SA noted that the continued drought conditions in the Western Cape and a severe hailstorm in Mpumalanga resulted in extensive crop damage, which also placed additional pressure on production in the second quarter.

Pienaar said agriculture, which had poor numbers for two consecutive quarters, might recover in the third quarter. “There was a decline in inventories. I would expect that we get a positive print in the third quarter. While it may not be a great print, I think we will exit the recession the third quarter,” he said.

Commenting on Tuesday’s data, Pienaar said while the BER expected poor data results, it had not expected it to result in a technical recession.

The transport industry contracted by 4.9 per cent, largely due to decreased activity in both land and air transport. Industrial action within the industry, combined with a decline in freight transport, contributed to the slowdown.

The trade industry experienced its second consecutive quarter of negative growth, falling by 1.9 per cent, while government activity decreased by 0.5 per cent, largely as a result of falling employment numbers in the civil service.

Pienaar said for the first half of this year, the South African economy only grew by 0.9 per cent year-on-year when looking at the seasonally adjusted figures.

The national Budget tabled in February forecast growth to come in at 1.5 per cent for 2018.

“At that stage it was a fairly conservative forecast. I’m not saying that National Treasury was overly optimistic at that stage, it sounded like a realistic number. But now, with 0.9 per cent for the first half of the year, it’s going to be extremely difficult. I can’t see that [we’ll] get to 1.5 per cent,” said Pienaar.

Finance Minister Nhlanhla Nene is expected to table the Medium Term Budget Policy Statement (MTBPS), which is also known as the mini-budget, in Parliament in October.

Pienaar said Government, the private sector as well as economists may have over-estimated growth after the economy grew by 1.3 per cent in real terms in 2017. “Now it’s very likely that growth will be weaker this year than last year,” he said.

The data has implication for fiscal policy, meaning that revenue will likely be less than what was forecast in the February Budget. “I think our budget deficit and our fiscal ratios, come October with the MTBPS, are going to look worse than what we thought in February.”

At the tabling of the Budget, government expected the budget deficit to narrow to 3.5 per cent over the next three years. The Budget also expected a revenue shortfall of R48.2 billion in 2017/18.

In terms of what has widely become known as Ramaphoria following the change of guard in February, Pienaar said this had faded in the last couple of months. “It’s been clear for quite some time that Ramaphoria was temporary in the first quarter of this year and of course, the global economy has also moved against us. We’ve had the emerging markets crises like in Argentina,” he said of the country, whose Peso collapsed and has announced austerity measures.

The crises in emerging economies like Argentina are also having an effect on the Rand. “These GDP numbers confirm that Ramaphoria period was pretty temporary. One also needs to be realistic that even in the first quarter when we had that bounce in confidence, it was not based on fundamental underlying improvements in the economy. It was solely based on expectation that the political changes would down the line result in better outcomes,” said Pienaar.

President Cyril Ramaphosa became President of the country in February following former President Jacob Zuma’s resignation.

“It probably means that President Ramaphosa’s task of turning this ship around is even harder than it was in the beginning of the year,” said Pienaar.

Pienaar advised consumers to be prudent with their hard earned money in the coming months. “Although the economy is weak, if the Rand continues to weaken at the current rate, I think the Reserve Bank will have very little option but to increase the repo rate. I don’t think it will be a dramatic increase but the point is, the next move in interest rates are likely to be higher. The cost of credit will go up a little bit. I advise that consumers be prudent.”

The central bank’s Monetary Policy Committee (MPC) is expected to hold its second last meeting of the year from Sept 18 to 20. At its pevious meeting in July, the MPC kept the repo rate unchanged at 6.5 per cent per annum.

Source: NAM NEWS NETWORK

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