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Recession probably over already – analysts

Jun 13 2017 06:00
Lameez Omarjee

Johannesburg – The economy had entered a recession as far back as September 2016 and has probably started recovering, say analysts.

According to a note issued by Dave Mohr, chief investment strategist and Izak Odendaal, investment strategist at Old Mutual Multi-Managers, growth in the second quarter of 2017 may have recovered.

Last week Statistics South Africa (StatsSA) indicated that the economy contracted 0.7% for the first quarter of the year. This followed a contraction of 0.3% in the previous quarter. A technical recession is defined as the economy contracting for two consecutive quarters.

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Mohr and Odendaal wrote that the second quarter data so far shows an improvement in the manufacturing sector.

“A single quarter’s data is also subject to revision by StatsSA who may later find that the first quarter was actually positive.”

Mohr and Odendaal suggested it is more useful to consider a recession as a “deep, persistent” decline in economic activity across a range of sectors. “The actual decline in real GDP over the past two quarters is a mere 0.25% and hardly counts as deep.”

In contrast, major economies reported growth in the first quarter. “South Africa typically follows the global cycle with a lag and the recent improvement in global growth is another reason not to be too pessimistic on local prospects,” they said.

Local bonds still remain attractive and the South African Reserve Bank (SARB) is more likely to cut rates, said Mohr and Odendaal.

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The expectation is for inflation to continue to fall and the rand to trade firmly below R13/$, despite the recession and downgrade. The rand is likely to react to the US interest rate announcement this week. “If there is no adverse impact on the rand, that will remove one of the main reasons not to cut. Lower rates and lower inflation should in turn take some pressure off consumers.”

ALSO READ: What you need to know about a recession

Johann Els, senior economist at Old Mutual Investment Group previously said that the recession indicates that two rate cuts could be possible before year end. Spending weakness, declining inflation, a stronger rand and an improving current account deficit could be enough reason for the SARB to cut rates, he explained.

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