Is the economic recession really over?

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Prof Danie Meyer | Senior researcher and lecturer: Faculty of Economic and Management Sciences | North-West University | daniel.meyer@nwu.ac.za | www.nwu.ac.za |


Despite the surprisingly positive growth rate of 2,5% for the second quarter of the year, the economic growth rate means that the South African economy has technically exited the short period of recession, current macro-economic indicators are painting a mixed picture of possible outcomes and prospects for the remainder of 2017 and beginning of 2018.

The reported positive growth rate can be ascribed to the low base after two quarters of consecutive negative growth. With inflation stabilising below 5% – which is a clear indication of a slowing economy, the Reserve Bank is allowed the opportunity to reduce interest rates over the short term.

At the last Monetary Policy Committee (MPC) meeting that took place, the repo rate was held stable at 6,75% despite expectations that it would be reduced. The Reserve Bank missed out on a golden opportunity to boost economic growth even further. With rising petrol prices and a depreciating currency, a similar opportunity to reduce interest rates may not present itself at the next MPC meeting scheduled for November 2017.

With the Consumer Price Index (CPI) dropping by 220 basis points since December 2016, the need for a significant reduction in interest rates – as a stimulus for economic growth of at least 0,5% – is clear.

Other factors

Reduction in the repo rate

A reduction in the repo rate (and therefore the prime rate), will have a positive impact on South African’s Gross Domestic Product (GDP) towards the end of 2017 and the beginning of 2018.

Global price of Brent oil

The increase in the global price of Brent oil by close to 20% over the past three months has been transferred to local petrol prices in South Africa and as such consumers had to increasingly dig deep in their pockets to fuel up.

The rise in oil and petrol prices could prevent inflation decline on the short run since rising petrol prices will subsequently force inflation to rise again towards the end of 2017.

Exchange rate

Movements in the already volatile exchange rate are also mostly upwards with a depreciating Rand.

This depreciative movement will put also impact inflation as petroleum and luxury goods are imported and a weak Rand will result in price increases. South Africa’s current account is also under pressure, with the deficit of the balance of payments increasing from R91 billion in the first quarter of 2017 to R110 billion in the second quarter of 2017.

Economic growth results

In terms of economic growth results in the second quarter of 2017, the positive growth of 2,5% was higher than expected; with the agricultural sector contributing the most with 0,7% of the total.

Manufacturing only contributed 0,3% to growth and is still sluggish in terms of development. Usually the third and the fourth quarters of the year allows for higher output in the manufacturing sector, but it is not expected that this sector will show significant increased growth during the rest of 2017 or beginning of 2018.

It is expected that overall economic growth in the third and fourth quarter will remain positive but at low rates of between 0,4% and 0,6% respectively.

Investment strike

An important negative situation to keep note of is that investment numbers have decreased by 2, 6%, indicating a wait-and-see outlook for businesses at present.

The latter can be classified as an investment strike and can be linked to continued policy and political uncertainty.

Outlook

South Africa has been able to achieve positive growth during the second quarter of 2017 and this trend is expected to continue, but at a relatively low growth rate of about 0,5% towards the end of 2017 and beginning of 2018.

This low growth environment will however lead to job losses and an increase in the unemployment rate. South Africa needs a growth rate of at least 3% per annum in order to reduce the unemployment rate of 27,7%.


 

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