South Africa is facing an economic ‘horror show’ – but we could still avert recession

In terms of economic data, South Africa’s 2019 film has begun in much the same vein as 2018, and could easily be classified within the ‘horror’ genre given heightened fears that South Africa could once again enter a technical recession in the first half of the year.

This is according to Maarten Ackerman, chief economist and advisory partner at Citadel, citing the latest figures from Statistics South Africa which showed that the economy shrank by -3.2% in the first quarter of 2019.

“This is not a good start to the year for Ramaphosa’s administration, which continues to struggle with numerous legacy issues that have resulted from years of poor economic management and graft,” he said.

“As long as economic growth remains at these kinds of mediocre levels, government is not going to gain any real traction in resolving key challenges of inequality and unemployment, and specifically youth unemployment.”

Ackerman said that the biggest positive contributor to economic growth was government (1.2%), largely as a result of growth in civil service employment.

“But while this spending made a positive contribution to GDP figures for the quarter, it’s not helping government’s goal of reducing its expenses given our deteriorating fiscal situation,” he said.

“There is evidently a great deal of work still ahead of Ramaphosa’s administration in terms of reducing headcount and making progress on the bloated public sector wage bill.

“South Africa simply can’t rely on government to be one of the only three positive contributors to the GDP number if the country is to achieve inclusive and sustainable economic growth.”

According to Ackerman, the only two remaining positive contributors for the quarter were finance and personal services, while all other sectors of the economy seemed to experience severe pain, negatively impacted by a weak local and global environment, and heightened load shedding.

“This said, fiscal stimulation in China and the US Federal Reserve placing interest rates on hold should create a more positive external environment in the global economy in the second half of the year, which may help to support South Africa’s rebound from the low base line that has now been set.

“Ultimately, however, the global environment and external forces are slowly turning into headwinds rather than tailwinds, which will make it more difficult for the local economy to finally turn the corner and achieve growth above 2%,” said Ackerman.

Read more on South Africa’s GDP stats here.

Averting recession?

South Africa’s economy may avert a recession if Eskom is able to keep the lights on through winter, reports Bloomberg.

The wave of rolling blackouts from November through March were among the worst the country has yet experienced, causing manufacturing, mining and agriculture to decline.

While weak factory-sentiment data in the current quarter raises the risk that the economy may slip into the second recession in successive years, consistent power supply could see this avoided.

“The only thing about such a large contraction is that it creates a large base effect, which helps an economy to bounce – so you would have to do worse in the second quarter than the first quarter in order to get a technical recession,” said Gina Schoeman, an economist at Citibank South Africa.

“We don’t have enough visibility in the high-frequency data, but there’s no doubt, our GDP forecast for the year has been 0.9% and we’ve been below consensus – I wouldn’t be surprised if the consensus drops further now.”

Read: South Africa’s economy – it’s much worse than everyone thought