SA on recession watch? You bet
WHEN reporting the First National Bank/Bureau for Economic Research consumer confidence results last week, it was noticeable how sensitive many people were about the “R-word” – recession.

Not everyone has apparently made the jump to such a drastic deterioration in economic outlook and it wasn’t as yet the way to think or generally speak of things.

Give them time and they will come around. We are on recession watch now, purely led by data, momentum and events. And policy choice. South Africa is joining the ranks of the United States, United Kingdom and New Zealand, which are also on recession watch.

To recap, a recession is said to occur when we have two or more consecutive quarters of gross domestic product (GDP) declining. Is that really so impossible under current circumstances?

One may feel intimidated after four years of robust prosperity, entering 2008 with five to five-and-a-half percent growth momentum. It’s difficult to accept the speed of deteriorating events, having to contemplate an abrupt cutting of the economic engines, rapidly gliding to a standstill.

Yet we have been preparing the economy throughout 2007 for a change of pace for the worse and 2008 happens to bring together forces that can and do cut growth.

One obvious observation is that the motor trade on the passenger car side entered recession as long ago as late 2006. Other consumer goods retailers and their manufacturing suppliers – like furniture, household appliances – joined this parade a year ago.

Since then, residential real estate and residential building contractors have been added to this growing list – which continues to lengthen.

Looking at GDP in an overall sense, it still showed year-on-year growth of 4percent in the first quarter of 2008, but that was a statistical illusion. In a high growth phase like the last four years, whenever a quarter is compared with a year ago, one is always working off a low base, yielding a high growth number when comparing with a year ago.

The fourth quarter of 2007 still had annualised GDP growth of 5.3 percent, a mighty roar and, indeed, a last hurrah. The first quarter of 2008 slackened off to 2.1 percent growth and, when excluding agriculture, the remaining 98 percent of GDP was already down to a speed of 1.7 percent. That’s like having your voice cut off in full oratory.

And that was only the first quarter. More slowing lies ahead.

Historically, 12 months of declines in the South African Reserve Bank’s leading indicator heralds the onset of recession. In other words, GDP growth has becalmed and the level of real GDP now starts to decline. Put differently, we are starting to see annualised decline in GDP.

At least two consecutive quarters of such conditions in a generalised sense, with real income, output and formal employment dropping, would qualify as a recession. That line of reasoning would make the last quarter of this year and possibly the first two quarters of 2009 suspect.

True, the first quarter of 2008 was marked by special supply interruption, particularly Eskom electricity cutbacks and the way this hit especially mining output, but also parts of manufacturing and retailing.

The Rand Merchant Bank/BER business confidence index, the FNB/BER consumer confidence index and the much newer Investec Purchasing Managers Index are all qualitative opinion surveys trying to get a sense of changing conditions in the economy.

All three have turned decidedly negative in the past 12 months, by late 2007 heralding not only an end to the eight- year economic upswing under way since 1999 and signalling the start of a downswing, but also by the very abruptness of their changes signalling a much bigger change still ahead which could easily end in a recessionary becalming and decline.

Is there reason for such abrupt and deep change in sentiment? Yes, there is.

For some consumers it may have been the social and political events of recent months that were the main triggers, in some instances giving rise to emigration decisions.

and a uniform intention across nearly all goods producing and distributing sectors to cut staff levels.

On the positive side are windfall growth conditions this year in agriculture (maize harvest 60 percent above normal) and high commodity prices supporting mining (though output suffering due to electricity shortfalls).

Infrastructure-led construction is government dependent, parts of heavy industry benefiting accordingly. Public sector is recession proof, expanding merrily at 3.5 percent.

Together, these sectors represent 25 to 30 percent of GDP. But in the remaining 70 to 75 percent of the economy certain sectors have already for some considerable time been in deep recession. This weakness is spreading steadily wider as households lose purchasing power and real income.

Households as much as private business appear to be in transition, from a high growth period ending in 2007, progressively throttling back spending speed ever since, but especially so since Easter 2008.

Yet with this very severe change in perception and loss of momentum already behind us, South Africa still faces yet higher inflation in coming months, with CPIX projected to reach at least 13 percent in the third quarter of 2008.

What’s more, with crude oil above 145 there is as yet no certainty how high these prices could go, feeding through to yet higher inflation. And going by popular comment, media views and market signals, the South African Reserve Bank may not have finished raising rates, with the April and June 0.5 percent rate tightening in any case still to fully impact on the economy.

With electricity supply uncertainty continuing, changes in political leadership, and possibly policy, looming, and global inflation forces potentially still intensifying their pressure on us, South Africans are responding by downscaling their confidence and spending intentions.

Are we on recession watch? You bet.

  • Cees Bruggemans is chief economist of First National Bank

Article by: Cees Bruggemans -