Recession: Surprise!!

Second Recession in Eight Years
 
South Africa plunged into its second recession in eight years during the first quarter of 2017. Africa’s most industrialised economy contracted by 0.7% in the first three months of the year after a 0.3% drop at the end of 2016. The London Financial Times newspaper points out that the two consecutive quarters of decline mean that the country had already begun its recession – its first since 2009 – when President Jacob Zuma sacked Pravin Gordhan in an event that shook already fragile investor confidence and splintered the ANC. These latest shock growth figures, which were much worse than the market had expected, could increase the risk of further ratings downgrades and dent already weak investor and consumer confidence levels. This will also make it more difficult for new Finance Minister, Malusi Gigaba, to deliver on his promises of fiscal consolidation when he presents his mid-term budget review in October.

Worse than expected GDP
 
Economists had expected growth of 1% for the first quarter of the year and, as a result, the 0.7% contraction came as a major surprise. Agriculture and mining staged strong recoveries as expected, but Statistics SA reported that trade and manufacturing were the two major industries that weighed growth down in the first quarter, with the trade sector recording a sharp 5.9% drop. GDP figures on the expenditure side showed household spending had swung to a negative 2.3% in the first quarter, from a positive 2.2% in the fourth quarter of last year. Exports contracted 3.2% after jumping 12.5% in the final quarter of 2016 and growth in investment spending slowed to 1% from 1.7%.

The Treasury said in a statement: “This worse than expected GDP outcome introduces significant downside bias to the GDP growth estimates communicated in the 2017 budget review, which projected 2017 GDP growth at 1.3%. If it were to be sustained, the current growth rate would put the fiscal framework at risk and undermine the state’s delivery of social services”. First National Bank senior economic analyst, Jason Muscat, said the weakness in the figures was incredibly broad-based, with only the agriculture and mining sectors expanding. “Without growth in the primary sector, GDP would have contracted by a massive 2%,” he said. “Our concern is that the numbers are backward-looking and don’t reflect the confidence shock we expect post the Cabinet reshuffle and the credit downgrades.” 

Financial Services sector’s first contraction since 2009
 
Nedbank senior economist, Nicky Weimar, said: “The decline in the financial services sector wasn’t taken into account because we very rarely see a negative number. The sector was robust before the horror of the Cabinet reshuffle, so we didn’t expect it.” The financial services sector, which accounts for 22% of GDP, slumped by 1.2% quarter on quarter in its first contraction since the 2009 financial crisis. Citi economist Gina Schoeman said that the Reserve Bank was likely to have been surprised by the extent to which quarterly GDP growth fell in the first quarter, but the Bank’s current 1% forecast for 2017 would only lead to a downward revision of a few percentage points by the next monetary policy committee meeting on 20 July. However, the weak state of the tertiary sector and household consumption “is likely cause for concern in the minds of the MPC (monetary policy committee) and will fuel discussions about the potential rate cutting cycle,” she said. 

Other than being in a technical recession, a recent editorial in the Business Day newspaper puts the spotlight on the main reasons to be worried. First, it was widely expected that the rebound in mining, and particularly in agriculture, would help SA avoid a recession. They did rebound, but not sufficiently to counterbalance something that has been apparent in the recent company results of the retail sector: a consumer spending pattern that is fraught with strain and apprehension. The second reason for concern echoes the worry from the Financial Times columnist. These numbers reflect the state of the economy before the political drama of the midnight Cabinet reshuffle at the end of March, so any effect that might have had on confidence will be clear only when second quarter numbers are released. In the meantime, it’s obvious that the problem is in the consumer-facing sectors. What effect the reshuffle and the consequent political drama will have on consumers is unknown, but it is unlikely to be good. 

As Capital Economics economist, John Ashbourne, points out, this result suggests that high unemployment and stagnant wages are finally dragging down the long-resilient consumer sector. The numbers confirm that the economy has contracted in four of the previous eight quarters.This is among the worst performances recorded anywhere in the emerging world. He further points out that SA has not achieved three consecutive quarters of growth since 2014-15. The Business Day editorial suggests that in this context, one is inclined to grasp at any positive straws and happily there is at least one. Gross fixed capital formation rose for a second consecutive quarter in the first quarter. Investment spending fell for four consecutive quarters in 2016 and the year before, and that was considered a key reason why headline growth was weak in 2016. The release of these shock GDP growth figures help explain why, after some initial confidence, there has been a host of downward revisions of SA’s likely growth for the full year, the lastest being the World Bank, which is now expecting only 0.6% in 2017. 

Lessons learned
 
So what is to be done? It’s a frustrating and difficult question because the answer so often seems glib and repetitive. But the essence does not change and will not change. The government needs to infuse the economy with confidence, and business needs to capitalise on that confidence and invest. Those are the brute facts of life, and there are no short cuts or magic formulas. In a perverse way, at least now we know what not to do - Initiating a totally unnecessary political crisis, increasing policy uncertainty and adopting anti-investment policies.

The view from abroad is that the firing of Pravin Gordhan, a critic of corruption in state-owned companies under Mr Zuma, pushed Fitch Ratings and S&P Global to cut South Africa’s investment grade status. ANC leaders openly criticised the president, while the party’s political allies called for his resignation. The turmoil has increased in recent weeks, with Mr Zuma rebuffing an attempt to unseat him as state president, despite the scandal over his friendship with the Gupta business family, who have denied using ties to him to influence public contacts. Returning to recession will also deepen concerns about South Africa’s failure to tackle deep-seated structural blocks on growth, including unemployment that has risen to its highest levels since 2003, at 27%, while per capita GDP has been declining for several years. 

Investors fear that the ANC’s battle over replacing Mr Zuma, who is in his second and final term as state president, and is due to step down as party leader in December, will distract the party from making tough structural reforms and lead to a lost year for the economy. The outcome of the succession race will have a big effect on the party’s fate in 2019, where it faces the most difficult elections since taking power in 1994. 
 
Toxic Combination of policy uncertainty and grand corruption

Mmusi Maimane, leader of the main opposition Democratic Alliance, said: “It is the ANC that has led us to this point of economic collapse … it is a toxic combination of policy uncertainty and grand corruption which has led us to this point.”
 
An editorial in the Financial Times comments that Jacob Zuma’s presidency is the scandal that keeps on giving. That it has endured until now is symptomatic of the extent to which the integrity of the ruling African National Congress, and indeed the sovereignty of the state, has been compromised under Mr Zuma’s leadership. There is an opportunity to stop the rot later this year, when the ANC elects a new leader. But already with every passing day, vested interests are weakening the very institutions with the authority to fight back. It would be naïve to think that those who have benefitted with increasing impunity from the corruption that has flourished under Mr Zuma’s watch, will surrender their power. It is also naïve to think that officials, whom the president has the power to appoint, will conduct a credible enquiry, although the need for a thorough investigation is obvious.

The persistent scandals are damaging not only South Africa’s capacity to attract investment, but tarnishing the rest of the continent too. 

Yet, there are glimmers of hope. South Africa’s journalists are already valiantly exposing the rot at the heart of government. Some in the ANC are belatedly realising they must act. The party has called for a probe, acknowledging that the emails doing the rounds “call into question the integrity and credibility” of the government. 

It may be that the cancer in the party is already so widespread as to be fatal. Whoever succeeds Mr Zuma in the most important leadership contest since the end of white minority rule, needs the will and the strength to make the necessary changes. At this point, only a clean-up from root to branch can redeem the reputation of a liberation movement that once held the moral high ground, with dignity and purpose.