South Africa needs to avoid an impending recession
We are one month into Jacob Zuma’s new term as the country’s first citizen, and if politicians think that they are in for an easy five years, they are about to get a rude awakening as recession worries continue to mount.
There are signs that South Africa is slowly starting to lose its international appeal as an investment destination of choice. We have lost our accolade as the number one economy on the continent to Nigeria and the continuing impasse in the platinum strike is really increasing the noise being sounded by international alarm bells.
Can South Africa really afford a recession? And are our politicians capable of getting us out of the trouble we have find ourselves in?
GDP needs to increase
While South Africa’s economy cannot be described as the most fragile economy in the world, there are a lot of aspects about the economy which should be concerning as it does run the risk of turning fragile very quickly.
South Africa is heavily dependent on mining as the largest contributor towards the country’s gross domestic product (GDP). While this served the country well in the past, the sector is far from the bastion of strength that it once was with underlying human rights issues boiling over. We are just over a year away from the Marikana disaster while we are facing the longest mining strike in the history of the country which at times could have gone the same way. By letting the strike continue for five months, an economic downgrade is almost a certainty.
The recent release of manufacturing data, although negative, was better than expected and showed improvement when compared to manufacturing data during the first quarter of this year. Although it is too early to make predictions, the numbers suggest that South Africa’s second quarter GDP should improve slightly.
This is the view of Maarten Ackerman, Portfolio Manager and Investment Strategist at Citadel Investment Services, who says that should the second quarter of this year deliver a negative GDP growth rate, South Africa will technically be in a recession.
“The technical definition for a recession is two subsequent quarters of negative GDP growth. We had a negative number of 0.6% quarter on quarter annualised, for the first quarter of this year. Unfortunately, the current growth environment is still deteriorating and activity indicators remain extremely weak. The debate is now whether we are likely to see another negative number for the second quarter of this year which will technically mean that we are in recession,” says Ackerman.
Pulling together to clean up the mess
This would be catastrophic for the country as it leads us further and further away from the targets set out by the National Development Plan (NDP). While many acknowledge that the original growth target of 6% was highly ambitious, even revised targets of 2% or even 3% now also seem to be leaning in the same direction.
“The first quarter GDP was pulled down by mining detracting almost 25%, which is its worst number since the mid-1960’s, and manufacturing dropping almost 5%. These two indicators contribute about 20% to GDP. The other 80% actually recorded growth of around 2%. Although South African consumers are under pressure and disposable income is declining, higher interest rates are only likely to weigh significantly on consumer spending going into 2015, especially if we see more rate hikes. The second quarter might therefore be negative, but the magnitude is likely to be considerably less as we don’t expect another 25% drop in mining,” says Ackerman. He adds that growth should rebound towards the end of this year coming from the low base created during the first quarter.
“However, the strike activity in the mining sector needs to be resolved soonest, so that exports can return to full capacity.”
Manufacturing data is heavily dependent on infrastructure development, and we do not see much activity in that market happening anytime soon. But there is no reason that there should be no activity in this market.
Telling government some home truths
How much longer is government going to make promises of ramping up Medupi before it actually lets actions speak louder than words? We all thought that the 2010 World Cup Stadiums would turn into white elephants.
But it is actually Medupi that is growing the biggest tusks. Manufacturing depends on a solid and dependable electricity supply, yet Eskom is under pressure to provide this basic service to the public. Government knew we needed new power stations as early as 2007 and they knew that the need to build these is paramount. Why delay then? Every single resource should be thrown at Medupi so that the challenges that plague its development crumble.
The five month long platinum mining impasse has still not been resolved. But why has government allowed the Association of Mineworkers and Construction Union (AMCU) and mining bosses to stand across the room staring at each other for such a long period of time? We have had strikes in the mining sector before, and mining houses have played the waiting game because they knew that the resolve of the workers would either eventually crumble or sense would prevail. This time things worked out completely different.
Editor’s Thoughts:
We need to ask ourselves if the government that was elected is the right one to take this country where it wants to be, because South Africans deserve so much better. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
