THE prospect of a recession is rearing its head. The last time South Africa entered a recession (the only time as a democratic state) was in the first quarter of 2009, as the global financial crisis wreaked havoc on developed and emerging markets. A recession is defined as two consecutive quarters of negative economic growth. We will only know if the country truly is in recession when first quarter GDP data is released in the first week of June, but early data is not promising.
February mining and retail trade sales data came in at a miserable -3.6% year on year and -1.7% respectively, both after poor January numbers. Combined, these two sectors make up more than a quarter of GDP, and an equal portion of the workforce. Better global growth has seemingly not lifted domestic manufacturing production, and a moderating inflation profile has not provided any household consumption impetus. What we have seen, as in the Reserve Bank’s Quarterly Bulletin, is household deleveraging. Household debt to disposable income stands at 73.4%, the lowest since the first quarter of 2006. When mining and retail sales are viewed together, the data tells of extremely weak domestic demand, as real wage growth moderates, job creation stagnates and credit extension remains muted.
Retail trade sales are particularly telling, and provide insight as to how consumers adapt during belt-tightening. In February, general dealers, food and beverage and pharmaceutical retailers were the only positive contributors, up 0.8% year on year, 5.8% and 3.3% respectively. Clothing retail sales contracted for the second consecutive month, declining 7.6%, while furniture (6.5%) and hardware (5.5%) both registered sharp declines. The data reflects changing household spending, away from discretionary items, with disposable income directed to cover essential items, and the remainder used to rehabilitate household balance sheets. While household de-gearing is positive for long-term growth, it negatively affects GDP in the short term.
Of greater concern is that the data at hand is backward looking, and does not account for the cabinet reshuffle, the resultant credit ratings downgrade, and the shock this would have on business and consumer confidence. A hit to confidence results in reduced spending in anticipation of tougher times to come. Already, private sector fixed investment has been contracting for six quarters, and household consumption of durable goods has been shrinking for seven quarters. Economists are furiously downwardly revising their growth forecasts. The ratings agencies haven’t yet, as they lowered their view not on economic fundamentals but on heightened political and policy risk. They will have to eventually. Ultimately, the National Treasury, the South African Revenue Service and the Reserve Bank will have to follow suit. The implications? The Reserve Bank may have some leeway in not having to raise interest rates for some time as the inflationary pressures are largely exogenous. The Treasury and SARS will not get off so lightly. Unless the receiver can lift the tax buoyancy rate (the ratio of nominal GDP growth to tax revenue growth), it may again have to lower its tax revenue collection targets. This places the burden on the Treasury, which will have to raise taxes further or lower expenditure, or, more likely, a combination of the two. Domestic prospects have taken a turn for the worse.
This article was first published in the Sunday Times on 16 April 2017.