Dark clouds are gathering for South Africa with fears the ailing economy – which shrunk by 1,2% in 2016’s first three months – could fall into recession after hitting a slump in the first quarter of 2016.
Although a technical recession is described as two successive quarters of economic decline, economist Dawie Roodt told Fin24 in his view South Africa is already in a recession.
“As far as I am concerned we have been in a recession for the past year. The reason is our economy has been growing below the growth levels of our population.”
Roodt says South Africa is battling with soaring unemployment and low skills.
“We need to grow the economy’s primary sectors such as mining and agriculture in order for unskilled people to work, but both these sectors are in recession,” he cautioned.
What went wrong
The first quarter gross domestic product (GDP) figures announced by Stats SA on Wednesday came out worse than the markets expected. It showed that the economy contracted by 1.2%, down from marginal growth of 0.4% in Q4 2015.
The drag on the economy came mainly from a sharp drop in the mining and quarrying sector (-18.1 % quarter-on-quarter), hurt by the sluggish global demand and the ongoing slump in global commodity prices.
In addition, sharp declines were also recorded in the drought-damaged agriculture sector (-6.5 %), in electricity, gas and water (-2.8 %) and transport, storage and communications (-2.7 %).
It’s the third time since 2014 that GDP ventured into negative territory. In the first quarter of 2014, GDP fell to -1.6%, but recovered in the following months. In the second quarter of 2015 it again declined to -2%.
Roodt says to get the country back on track, the government needs to address labour legislation, skills development and infrastructure; however he added that South Africa is suffering from weak political leadership.
Policy reforms needed
The Institute of Race Relations (IRR) called for policy reforms to be urgently implemented to avert a recession.
IRR CEO Dr Frans Cronje says the mining and agriculture sectors are being undermined by hostile and counter-productive policymaking.
The agriculture sector is still plagued by the lingering impact of the drought on many farming regions, while the mining industry faces uncertainty with a new draft Mining charter on the cards and the draft Minerals and Petroleum Resources Development Amendment (MPRDA) bill still not concluded.
“Ideology is still too dominant a factor in government policymaking and there is a reluctance to accept that ideology does not work in the real world,” he says in a statement.
“Despite statements about the importance of growth there is very little on the policy front to suggest that the Cabinet is serious about securing an economic turnaround”.
Cronje says the IRR would like to see in the next quarter certainty around mining policy and changes to labour legislation. “Specifically the introduction of strike ballots, a reworking of foreign investment protections and a complete redraft of pending expropriation legislation.”
Labour needs deregulation
He added that the labour market needs to see a significant degree of deregulation, empowerment policy must be sculpted so as not to deter investment, and property rights need to be secured.
“Without these steps South Africa will not secure the investment to drive higher growth and employment rates,” says Cronje. “If these steps are not taken it is difficult to see how South Africa will avoid entering a recession which would almost certainly trigger a sovereign rating downgrade by year-end putting the country into a sharply negative economic spiral”.
Director and Investment Strategist at Brenthurst Wealth Magnus Heystek says the depressed GDP figures is alarming news and time for belt-tightening by government and consumers.
“Dark clouds are gathering for the South African economy”, he told Fin24, adding that for investors this is equally bad news.
Heystek says now more than ever, in his view, investors need to diversify and look at investments beyond the local market.
“The outlook for returns from the local market has been dealt another blow with this poor growth number, in the wake of the many profit warnings already issued by companies listed on the JSE.”
The World Bank also slashed its 2016 global growth forecast, with South Africa now expected to grow at a 0.6% rate in 2016, 0.8 of a percentage point more slowly than the January estimate.
By Adiel Ismail for Fin24