The risks to GDP growth could still surprise on the downside

Over 15 million South Africans are too young to have lived through a recession. Are we facing one now? It still seems unlikely, but the risks to GDP growth could still surprise on the downside, says David Crosoer from Glacier Research. This uncertainty will throw up investment opportunities that good fund managers will profit from.

A recession is defined as two consecutive quarters of negative real GDP growth. Most recessions last just that, a couple of quarters, and by the time commentators realise we’ve had one we’re already out of it. It has been 60 quarters (15 years) since South Africa had two quarters of negative GDP growth, although GDP growth peaked in late 2006. This uninterrupted positive growth in the domestic economy is unprecedented, and has coincided with a period where the US economy has also grown strongly, barring one quarter of negative GDP growth in 2001. While the South African economy has clearly begun slowing, real GDP growth is still healthy, and according to most economists is expected to be close to 4% in 2008. Why then are certain commentators talking up the prospects of a recession?

South Africa has been vulnerable in the past to even mild US recessions, because of the pivotal role of the US in the global economy. SA needs to import capital goods to fund its growth which it pays for by selling its exports to the US and other developed countries. A slowdown in the US forces SA to slow down too. This does not necessarily mean that the South African economy automatically falls into a recession.

It looks increasingly likely that the US might already be entering a recession. US GDP growth slowed to a paltry 0.6% in the last quarter of 2007. Commentators that believe SA might go into a recession are concerned about the impact of a slowing US on global and South African growth.

Is this caution misplaced? The US Federal Reserve is doing everything in its power to avoid a recession by aggressively cutting interest rates. A US recession, if it happens, is likely to be brief. The continued growth of China and India should also lessen the impact of a recession in the US on South African exports, especially mineral exports.

The South African economy is slowing, but two quarters of negative GDP growth from today’s vantage point looks highly unlikely. The interest rate cycle appears to have peaked, and cyclical local companies in particular have been aggressively sold off in the recent market correction on the back of slowing growth prospects. At some stage their share price will be discounting more than what is reasonable implied by the slowdown in growth. Fund managers who get this call right can add significant value for their clients.