Johannesburg - Brait economist Colen Garrow said on Friday that a recession in South Africa is not likely this year, and it is
important to distinguish between a slowdown and a recession.
A recession is traditionally seen as two consecutive quarters of
contraction.
Garrow admits that some sectors are in recession, but others are pushing ahead strongly and on top of this leading indicators and the business cycle do not bear testimony to all the recession talk.
"The economy has slowed. After registering a seasonally adjusted annualised rate of growth of 5.3% in Q4 of 2007, GDP slowed to 2.1% in Q1 2008. However, a slowdown must be distinguished from a recession. Some sectors are already in recession - most notably in the supply side of the economy. For instance,
mining was most affected by the electricity outages which occurred in the first three months of the year. It came as no surprise therefore that this sector contracted by -22.1%, on the heels of a -1.7% contraction registered the previous quarter," says Garrow.
He adds that manufacturing could also slip in recession, if the Purchasing Managers' Index remains the reliable indicator it has been thus far.
However, he notes that in contrast to the poor-performing supply sectors, construction continues to post double-digit rates of growth, and has been for the past two years.
"The economy has been in an upward phase of its business cycle since
September 1999, a record since the central bank began keeping records in 1946.
Further, there have been thirty-seven consecutive quarters of positive economic growth. Leading Indicator data released by the South African Reserve Bank suggests a slowdown in the momentum of the economy over the next twelve months.
High interest rates - five percentage points up since June 2006 - have slowed demand-driven consumption. The Leading Indicator is corroborated by the Coincident Indicator, also released by the SARB," he says.
Garrow says the economy has exited the boom-bust phase which characterised the economic sanctions era of the 1980s, and entered a trajectory of higher trending GDP growth.
"In the decade prior to seismic political change in 1994, GDP averaged 1.0%; this almost trebled to 2.9% the following decade. Over the past three years GDP averaged 5.0%," he points out.
He adds that amidst the slowdown in household consumption expenditure, growth in gross fixed capital formation is accelerating.
"Large numbers of new, emerging consumers continue to enter the mainstream economy," notes Garrow.
He also points out that the rebasing of SA's GDP, from 2000 to 2005, takes place in November 2008.
"The data Stats SA accesses is through the SARS VAT register, and not through the older Business Register, which did not accurately record the shift away from commodities, towards areas where growth was happening in the economy, such as services," he says.
"Attesting to its resilience, the domestic economy did not fall into recession in 1998/99, as had economies in south-east Asia, and elsewhere, when global financial market turmoil struck. In 1998, local interest rates rose to 25.5%, a record high. Consumer interest rates, benchmarked by commercial banks' prime lending rates are currently 15.5%," says Garrow.
He concludes that terms of trade have been supported by high precious metals' prices, which have buffered the economy somewhat against record high oil prices.
- I-Net Bridge