South Africa’s shock GDP data released on Tuesday showing that the country has entered into a recession came a surprise to many, with economists saying that most alarming of all is how much poorer SA consumers are getting month by month.
Official figures released on Tuesday showed that South Africa’s economy contracted by 0.7% (quarter-on-quarter, seasonally adjusted) during the first quarter of 2017.
This follows the 0.3% contraction during the last quarter of 2016 and pushes the country officially into a technical recession.
Speaking to Radio 702, Investec Asset Management economist Nazmeera Moola said that the data showed that consumers are under immense strain.
“We all felt like the domestic market has been in recession for a few years, but we thought – because of the expected maize harvest, pick up in the mining industry and in tourism – we had escaped the technical recession,” she said.
According to the economist, while there is a definition for a technical recession, the ‘dark and gloomy’ reality is far more difficult to pin down.
Here, one needs to look at other indicators to tell how bad things are or will get – and consumer spending and tax revenue are places to look.
“Tax revenues can contract – that would be a very dark real recession. We don’t expect that to happen this year, but in real terms, it could,” Moola said.
With the projected growth in the second quarter of 2017, South Africa could very well be out of a ‘technical’ recession in Q2 – but that does not necessarily mean the ‘real’ recession is over.
“Portions of the economy that are dependent on consumer spending and direct investment will be under pressure for the rest of 2017,” Moola said.
Consumers in a crappy place
According to Moola, consumer pressure is mounting, and the current levels of salaries and wages represent the weakest growth in nominal compensation that South Africa has seen since the 1990s.
In effect, unemployment is up, and compensation for those who are employed has been lower than inflation, meaning the average South African has been getting poorer.
“If average compensation growth sits at around 4.5% and inflation sits at 6%, you have a real contraction in compensation,” Moola said.
BankServAfrica’s latest Disposable Salary Index (BDSI) echoed this view, showing that the average take-home salary in January 2017 versus January 2016 showed a real decline of 2.6%, despite being 3.9% higher in nominal terms.
“Add to that the tax measures being factored in…and it’s no wonder the consumer is in a crappy place at the moment,” the economist said.
Looking at the latest data from Stats SA, its clear that consumer spending is down across most sectors – even in areas like food. And things may get a lot worse.
The latest data may influence ratings firm Moody’s, to downgrade South Africa to junk. Before the GDP data, it was expected by economists to downgrade South Africa by only one notch, with a stable outlook.
According to chief economist at Efficient Group, Dawie Roodt, South Africa now faces the prospect of a two-notch downgrade by Moody’s, which would put the country in junk across all three ratings firms.
If Moody’s – and S&P Global – put South Africa’s local debt into junk, then it would lead to forced selling by investors, amounting to over R120 billion. This disinvestment will have an impact on the rand, which will then ripple across the economy, as has already been seen.
“All the ratings care about is the growth of the country going forward – that’s the income, that’s the taxable base. So weaker growth means bigger risk, and that’s a concern,” Moola said.