Having experienced two successive quarters of negative economic growth, South Africa experienced a technical recession between October 2016 and March 2017, and we are now officially in recession. This is according to NWU School of Business and Governance economist Prof Raymond Parsons.
“While this development may have come as a shock to many observers, it was presaged in the NWU's School of Business and Governance Policy Uncertainty Index (PUI) for 1Q 2017 released in April. A new balance must now be struck between negative and positive factors in SA's economic outlook,” said Parsons.
Phillip Pearce, dealer at TreasuryOne, highlighted that the Rand weakened following the news that South Africa is in recession. “The first quarter contraction of 0.7% QoQ was a shocker that caught many in the market off guard as an expansion of 0.9% was expected. All industries, except for mining and agriculture contracted, with manufacturing shrinking for the third consecutive quarter. The negative print in GDP could accelerate further credit rating downgrades as we await the decision from Moody’s and the SARB will likely keep rates on hold to keep inflation in check despite mounting pressure for a rate cut to stimulate growth.”
According to Jason Muscat, senior economic analyst at FNB, the GDP figures released were worse than expected. If it weren’t for growth in the mining and agricultural sectors during the first quarter of 2017, Muscat highlighted that the GDP would have contracted by 2%.
“The extent of the contractions in finance, real-estate and business services and government also surprised us, but reflect just how weak domestic demand and investment is. On a more positive note, the slowdown in government reflects the ongoing push toward fiscal consolidation, but does not bode well for overall growth going forward,” noted Muscat.
Future growth for 2017
Parsons pointed out that given recent trends and developments, the downside risks to SA's growth outlook for 2017 as a whole has risen and it is now possible that the growth rate this year will only be about 0.7%.
“This is well below SA's true potential as well as the targets of the National Development Plan. The latest weak growth outlook will have negative implications for employment, tax revenues, business confidence and future investment ratings. Whether we like it or not, the SA economy is entering rough seas, and the storm signals are up,” said Parsons.
Muscat added: “Our concern is that the numbers are backward looking, and don’t reflect the confidence shock we expect post the cabinet reshuffle and credit downgrades. In this context, it is little surprise that unemployment rose to 27.7% in 1Q17, and could deteriorate further in 2Q17. We don’t expect the figure to put a rate cut on the table, but it may give Moody’s something to think about.”
Overall, it appears that the economic outlook for South Africa has become more uncertain. Parsons noted that the full impact of the recent political developments will continue to unfold over time, with the economy increasingly affected by political factors.