June 29, 2017

News:

Mgcinazwe Zwane

1on1-the-weekly

theweekly.coSouth Africa is officially in a technical recession after it registered a second consecutive negative quarterly growth this year. According to the Statistics South Africa (Stats SA), economic growth decreased by 0.7 percent during the first quarter of this year following a 0.3 percent contraction in the fourth quarter of last year.

The Weekly’s Martin Makoni asked Central University of Technology (CUT) senior economics lecturer Mgcinazwe Zwane what this meant to the economy and what could have caused this negative growth.

Makoni also asked Zwane how this economic slump could affect both businesses and consumers and what should be done about it to get the economy back on track and minimise the feared adverse effects of the recession. Excerpts:

Stats SA announced this week that the country had entered into a technical recession, what does that mean?
A technical recession comes as a result of two consecutive quarters of economic shrinking. In this case, South Africa’s economy had a 0.3 percent negative growth in the fourth quarter of 2016 which was followed by another 0.7 percent drop in the first quarter of this year.

The largest negative contributor to the country’s Gross Domestic Product (GDP) in the first quarter was the trade, catering and accommodation industry, which decreased by 5.9 percent and contributed -0.8 percentage points to GDP growth. Manufacturing also contracted by 3.7 percent and contributed -0.5 percentage points to GDP growth. A total of seven out of 10 divisions reported negative growth in the first quarter.

What would you say are the main reasons for this slump in economic growth?
There are a number of reasons for this. International ratings agencies have been giving us negative evaluations for some time. That impacts on investor confidence. One of the reasons the ratings agencies highlighted was the country’s political environment and uncertainty on certain policies.

Now that political risk is beginning to weigh heavily on the economy investors are taking a more cautious approach on the economy. Some things that the country could have manufactured locally are being imported, resulting in the country having more imports than exports. Such products are usually more expensive and not many people can afford them.

Latest figures show that household consumption has gone down by about three percent over the past year, indicating a significant drop in people’s buying power. Overall, there has been a decline in industrial activities. While agriculture may have recorded positive growth in the last quarter, it has been adversely affected by drought.

The GDP figure is worked out by Stats SA based on the country’s economic activities and the results are essentially independent of the findings of international ratings agencies. Given that some of the issues raised by the ratings agencies have now had a pronounced effect on the economy, would you say the agencies are somehow vindicated?
Yes, they are. The ratings agencies were right. At one point they were accused of being racially biased and that they had some agenda on the economy but that’s not true.

The country needs those evaluations by ratings agencies because that’s how foreign investors measure their risk in the country. We can’t just dismiss those results if we really want to attract international investors. It’s important for the country to address issues raised by the agencies if we are to attract significant investments and put the economy on a growth path.

Now that the country is in this unenviable situation, what’s the likely effect of the recession on industry as well as the ordinary person?
We may see companies laying off workers which could result in more unemployment. We have very volatile labour relations situation in this country. Recently, we saw General Motors suddenly announcing that it was leaving the country after a presence of more than 100 years.

This means more people losing jobs. The political situation, like I said earlier, is not really helping the situation. More needs to be done in order to give confidence to potential investors. The drop in platinum prices and the effect of the drought on the agricultural sector will be felt for some time.

And coming to the Free State, there is not much activity going on as the mining and agricultural sectors remain subdued. This is despite the fact that they recorded some growth in the last quarter. More significant growth is needed.

Some proposed developments in the province have not really taken off, yet we need those regional economic activities to feed into the national economy. So, economically speaking, we are in the red.

This is not the first time that the country has experienced a recession, but it seems like people are panicking a lot, what’s so significant about this particular economic decline?
It’s true that this is not the first time that the country has experienced a recession. There have been a couple them before and the most recent was in 2009.

But you must remember, that recession was as a result of a global financial crisis. The whole world was in trouble but this time, we are all alone. There was also more money circulating in the economy and the government was not in as much debt as it is now.

Since that last recession, debt levels have doubled to 50 percent. Now, that makes it quite difficult for the economy to address the current situation. It will require more effort and time.

But why was the country caught napping, given that some “warning shots” were fired to alert authorities to the imminent economic decline?
The labour force, to some extent has too much power over business and this has discouraged some companies and potential investors, prompting them to leave.

The ratings agencies also warned the country about its plans to set up a nuclear plant at a cost more than its annual budget.

It means the country will struggle to finance the project and will remain indebted to another country forever. All these situations were pointers to the potential challenges that the country could face.

Treasury has however allayed fears on the impact of the recession saying there were possibilities for growth. From an economic point of view, how easy is it for the country to come out of this situation?
It could take up to three years to get the economy back on course and register positive growth again. Not much investment is expected in the country immediately and we could have this recession until 2020.

Treasury’s optimism needs to be quantified. The country is faced with a huge challenge. It should be willing to listen and work with different sectors including local businesses and academics who are usually criticised for highlighting important shortcomings.

Who should be worried more about the recession, a worker or someone living on a grant?
They should both be worried. The worker risks being laid-off as companies may want to contain costs and closely monitor production. While the money for grants may be already budgeted for by government, prices are likely to go up as a result of reduced production in some sectors.

And with time, due to reduced industrial activities, government may start collecting less revenue, which could make it difficult to cover the social bill. So, everyone in the country should be worried about the recession and all sectors should work together to address the situation.

And in the meantime, what should people do in order to move on under this recession?
We should all tighten our belts and save money because the storm is coming. While saving might be seen as taking money out of circulation, it’s a better thing to do than spending money that you don’t have.

We should only consider spending money on things that we need and not things that we want. Things that we want are mere luxuries and this is not the time for luxuries.

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