Economic Recession?

The Numbers
GDP Q1 2009 (QoQ Actual): -6.8% compared to 0.7% Q4 2008
GDP Q1 2009 (YoY Actual): -1.3% compared to 1.0% Q4 2008
GDP Q1 2009 (QoQ SAA): -6.4% compared to -1.8% Q4 2008
GDP Q1 2009 (YoY SA): -0.8% compared to 1.3% Q4 2008

SAA = Seasonally Adjusted and Annualised; SA = Seasonally Adjusted False words are not only evil in themselves, but they infect the soul with evil – Plato (427 BC - 347 BC), Dialogues, Phaedo

Introduction and analysis
Most analysts are of the opinion that South Africa is now officially in an economic recession. However, this is a very dangerous conclusion for a number of reasons.

Firstly, South Africa does not (like e.g. the US) have an official definition of an economic recession. It must be pointed out that the definition of two or more quarters of negative economic growth is not universal (as for example the IMF has its own definition of an economic recession namely negative GDP per capita growth for developing countries).

Secondly, the growth rate used by analysts to determine whether South Africa is in an economic recession is an artificial, and not the actual, growth rate. The artificial rate is the popular quarter over quarter seasonally adjusted and annualized rate (QoQSAA). The seasonal adjustment is determined by a computer model (to smooth fluctuations) and thus eliminates “the real facts
namely actual production.”

Thirdly, the QoQSAA growth rate is a forecast (and as such does not reflect the growth rate between the former two quarters). It assumes that what happened to growth in the previous quarter will be duplicated exactly for the remainder of the year.

Thus, by only utilizing the QoQSAA growth rate to determine whether the economy is in a recession or not, is misleading.

This is confirmed by analyzing the actual quarterly production numbers. Though the QoQSAA rate showed that the economy contracted by 1.8% in Q4 2008, the actual rate showed the economy actually expanded by 0.7% in Q4 compared to Q3 2008. (The contraction occurred because of seasonal adjustment downward in the fourth quarter). Yet analysts tended to ignore the actual number in possibly their haste to predict the more sensational recession.

The actual growth number for Q1 2009 did indeed, as in the case with all actual first quarter growth numbers (the contraction in Q1 2008 from Q4 2007 was 4.6%) show a sharp contraction. In number terms, (see Table 1 below) real production contracted to R302.4 billion in Q1 2009 from R324.4 billion in Q4 2008. This represents a contraction of 6.8%. Another contraction in the actual numbers in Q2 2009 will be needed in order to declare a recession – if the definition of two quarters of negative growth is accepted. However, if the Q2 2009 number is better than the R302.4 billion of Q1 2008, the question begs whether a recession can be declared.

What is needed is for the authorities to determine the official definition of an economic recession for South Africa and clearly delineate which rate (QoQSAA or actual or both) is to be used for such purposes.

Sectoral Analysis
Notwithstanding the debate about a recession, it is clear that the economy receded at a fast pace in Q1 2009.

This is evident from the QoQSAA rate of -6.4% (which only provides an indication of the speed at which the economy changes).

This is confirmed by the YoYSA rate of -0.8% (1.3% in Q4 of 2008) and the actual YoY rate of -1.3% (1% in Q4 of 2008). In addition, the actual QoQ rate of -6.8% is much larger (almost 50%) than the -4.6 registered in Q1 of 2008, showing extraordinary weakening.

Production in the manufacturing, electricity and trade sectors, which consist about 30% of the economy, was back as 2006 levels, whilst mining production was almost at its lowest level ever (since measurement).

However, all is not doom and gloom.

The construction sector continued its rate of expansion (0.1% actual QoQ and 12.3% actual YoY). Production in the transport, financial, government and personal services sectors, (combined it represents 48.7% of total production), was all higher on a YoY basis.

Though the unemployment rate increased in the first quarter, compensation of employees was 9% higher than in Q1 2008. Whilst the gross operating surplus was down 2.4% from Q4 2008 (continuing its downward trend since Q3 2008), it was still 5.3% higher than Q1 2008.

Outlook
With anecdotal evidence pointing to Q1 2009 as the weakest quarter, expectations are for Q2 to be a bit brighter but not yet shining. With a bit of luck the actual production (actual QoQ) might even be more than the R302.4 billion registered in Q1 2009.

On a YoY basis the actual growth rate will worsen given the high base registered in Q2 2008. The QoQSAA and YoYSA rates should also be negative, but especially the QoQSAA should show a smaller contraction.

The Q1 numbers as well as the still weakening outlook confirm another cut in interest rates of at least 100 basis points on Thursday.