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A shock contraction of 0.7% in the economy during the first quarter of this year has tipped South Africa into a technical recession and quashed any hope of creating enough jobs to halt the steady climb in its unemployment rate, which hit a 13-year peak of 27.7% during the same period.
News on 6 June that output fell in all key sectors of the economy except for mining and agriculture – which only account for a tenth of the total – suggests that growth will stagnate for the second year in a row and raises the risk of further credit rating downgrades.
The economy contracted by 0.3% in the final quarter of last year, which means that the country is technically in a recession, after growing by just 0.3% over the whole of 2016. Economists had expected growth of close to 1% during the first three months of this year.
Tax revenues will now fall short of forecasts and the government will have even less money to spend on debt, welfare programmes and employment incentives, which is likely to lead to further social instability and violent protests, analysts warn.
The other worrying omen is that the contraction in growth took place before President Jacob Zuma stunned the country with a Cabinet reshuffle which included the sacking of respected finance minister Pravin Gordhan, and prompted credit rating agencies to downgrade SA to junk status.
“Plunging growth and soaring unemployment encased in a toxic political environment are likely to mean a recession during the first half of this year and keep the economy suspended ahead of the ANC elective conference in December,” said Standard Bank’s chief economist Goolam Ballim.
“A stable political environment is the bedrock of growth and prosperity. The ranks of the unemployed will continue to swell in nominal numbers and the unemployment rate could reach 29% by the end ?of the year.”
The figures from Statistics SA also showed that household spending, the main driver of economic growth, fell by 2.3% in the first quarter of the year, suggesting that unemployment and low wage increases were finally taking a toll on consumers.
“It’s a huge shock – the numbers suggest that this slowdown in the economy is deeper than initially thought,” said Nedbank economist Isaac Matshego. “The turnaround will be delayed and there will be no traction for employment. We could see the jobless rate rising to 28% or 29% this year.”
In the first week of June official data showed that the total number of unemployed people in SA rose to a record high of 6.2m. The expanded jobless rate, which includes people who have stopped looking for work, rose to 36.4% from 35.6% in the final quarter of last year. At the same time, the jobless rate for young people between the ages of 16 and 25 rose to an alarming 65.7%.
The figures were particularly worrying given that the economy did manage to create 144 000 jobs in the first quarter and 538 000 over the past year – but this welcome trend was more than offset as the numbers of unemployed people rose by 433 000 and 491 000 respectively.
Jobs do tend to be shed in the first quarter of every year as temporary seasonal employment in the previous three months falls out of the equation and more young people leave school. But this time the numbers were much higher than usual.
“The economy is not able to absorb the rate at which people come into the labour force – it is not growing at a pace conducive to creating enough jobs,” said Kefiloe Masiteng, deputy director-general for population and social statistics at Stats SA.
Political analyst Ralph Mathekga said that people without jobs were more likely to take part in the service delivery protests, which according to government data have become increasingly violent over the past year.
“People who are idling are available and can more easily be fodder for protests – there is a positive correlation between the numbers of unemployed and the numbers available to protest, especially young people,” he said.
Municipal IQ, a specialised local government data and intelligence organisation, said earlier this year that although the number of service delivery protests declined to their lowest level in five years in 2016, this was due to a lull coinciding with local government elections.
Economist Karen Heese pointed out that violent protests increased from representing 75% of all service delivery protests between 2004 and 2015 to 86% in 2016. She said there was a record number of protests in May this year, with an increased level of violence.
Political economist Moeletsi Mbeki said that even university students were starting to worry about their employment prospects. Although the jobless rate for graduates stands at just 7%, those who couldn’t get employed were likely to be those who were the most disadvantaged, he explained.
“They will become the generals of the protest movements as they have better organisational capacity. I’m just guessing but it must be happening,” he said.
Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.
This article originally appeared in the 15 June edition of finweek. Buy and download the magazine here.
