Government must act to avert European summer of discontent in SA

South Africa will not escape an unexpectedly severe slow-down in the European economy, and is more vulnerable to a recession than in recent years when the rest of the global economy took a severe pounding.

So says BoE Private Clients economist Madalet Sessions, adding that the full consequences of European electoral outcomes remain to be seen, but that it was already clear that markets were becoming increasingly fearful about the prospects for riskier assets, particularly investments in developing markets.

The Sake24 and BoE Private Clients Provincial Barometers, which measure economic changes in five of the country’s provinces every month, show that all five had their sharpest decline since the recession over the recent quarter to April.

Mining provinces like Gauteng (-4.7% on a quarterly basis) and the Free State (-6.5% quarter on quarter) were impacted the heaviest by the sudden slump.

“Commodity prices took a beating because the global economy is not robust, and strikes at the country’s biggest platinum mines resulted in an overall contraction in the mining sector in the first quarter,” says Mike Schüssler, economist at Economists.co.za and the compiler of the provincial barometers.

Although the April slump raises the spectre of the previous recession, Schüssler says it's still too early to regard the downturn as a recession. “Remember, a recession is when the economy contracts for two successive quarters. We are not there yet.”

“I suspect there is merely some lethargy and we are unlikely to see one-way traffic down,” says Schüssler.

“Europe, in particular, remains an important trading partner and the SA economy is likely to be negatively impacted by any negative outcomes in global markets. As a current account deficit economy dependent on the willingness and ability of global savers to lend us cash, our economy is exceptionally vulnerable to changes in global risk aversion, such as worsening growth prospects.” Says Sessions.

But Sessions says that despite its vulnerability and recent slump, the SA economy remained in much better shape than its developed market peers. Furthermore, government interventions could ameliorate the worst of the effects.

“Monetary policy remains supportive and, given recent pronouncements, it seems likely that monetary authorities will continue to be supportive of growth. This helps. Also, despite more conservative and austere fiscal policy intentions as witnessed in the February budget, there is fiscal space to enable further support for growth, even if the likelihood of such intervention remains to be seen.”

Sessions says that some accommodation, if not outright easing, may yet materialise from the SARB.Some support from the fiscus would also help although tax cuts, while desirable, are most unlikely.

“Government should continue to support an aggressively growth-orientated policy to ensure we ride out any negativity from the Eurozone in particular,” says Sessions.