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With the South African economy having entered into a technical recession, difficult times lies ahead, writes Lin Ting
ON THE CAUSES OF THE TECHNICAL RECESSION
A technical recession is when an economy decreases its performance in two consecutive quarters. In economics, performance is measured in a number of ways using various methodologies such as inflation, interest rate changes, gross domestic product.
The most direct and simplest way is to measure our economic performance by our expenditure. Another way is to measure production, which is how much of goods and services we have generated. Both these measures are measured over a certain amount of time.
These two methodologies measure gross domestic product (GDP) or the value of final goods and services. So, from the one side we can look at DEMAND, how much (less) we are spending (and we know spending contributes to incomes for others leading to more spending – this is a simple and very brief explanation of what we call the multiplier effect) and from another side we can check SUPPLY, how much our businesses in the different industries are producing (are our business doing well?). These two ways can help us to assess where to focus our efforts – is it that we need to increase spending somehow? Or to help our businesses to ease production concerns? Which industries are hardest hit? Who do we help in terms of spending?
We can also use income (how much we have earned) but the first two methodologies are quite direct and less complicated.
BUT an important consideration is to understand that we need a longer period of time to better assess these (demand) spending and (supply) production trends. This is why data collection is so important for SARB, Stats SA, National Treasury.
So, the fact that South Africa is in a technical recession means that since the last quarter of last year, our economic performance (GDP) has been declining/decreasing, in other words, spending and production has decreased.
The Stats SA report provides a thorough analysis of which of our industries have contracted and which sectors of our economy has decreased their spending. Hence we know who is hardest hit. So, from the report we know that households have decreased their spending and manufacturing has decreased their production.
POSSIBLE IMPACT FOR CONSUMERS
For this we need to consider what South Africa’s objectives are in the long-term and what South Africa needed from this year, 2017, to help to reach those long-term goals. Our long-term goals and overall objectives are clearly spelt out in our National Development Plan (NDP) which readers should refer to have to have a better understanding of the common goals for all South Africans that is spearheaded by government. For what we needed this year, I refer to our budget speech by former Minister of Finance, Pravin Gordhan.
From the outset of the budget speech, we know that our economy has been underperforming, hence we’ve been falling below our forecasted and expected GDP growth rates (this we measure year-on-year). So, from last year, we need to make up for the shortfall in GDP growth rate adjusting for country-specific factors and world factors. Based on Treasury and Reserve Bank forecasts we could and were hoping to increase GDP growth by 0.5 percent this year.
However, based on our GDP figures in Q1 of 2017, government alongside Treasury and the Reserve Bank will have to sit down and consider what can be down to improve our GDP.
A main avenue is to boost business confidence, attract investors to South Africa, which has been fairly good performance since spending on capital formations (investment goods such as machinery, equipment to build infrastructure) has increased.
In the immediate term, we know everyone – all sectors and all industries, will continue to constrain themselves. Save a rand where they can as our outlook isn’t promising. So less risk-taking in hiring of new employees, not to say that there won’t be jobs, it’s just there will be less and the chances of less experienced or lower skilled guys will struggle more. But the danger is that we cannot continue to shrink our growth so a boost of confidence needs to come from somewhere.
Ms Ling Ting is currently an economics lecturer. at the University of Johannesburg in the Department of Economics and Econometrics. Her main area of focus is on social mobility, incentives and motivation of which she is currently doing her PhD research in.
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