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Blog : 7 June 2017 (South Africa's second #recession in 9 years. And worst to come?)
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In today's blog we will take a look at South Africa's latest economic growth figures, that for Q1:2017 which shows that South Africa's economy is in it's second recession in the last 9 years. And things are probably going to get a lot worse before they start getting better, as the full impact of South Africa's junk status downgrade and poor vehicle sales for example all show SA's economy is in for a tough time in Q2:2017.
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It's official we are in a #recession... again.
The graphic below shows the quarterly GDP growth rates from the dawn of South Africa's democracy. With a twist. It shows the quarterly growth rate per president of South Africa. And we were in good mind to add "Atul Gupta" to the list of presidents following all the state capture allegations and email leaks showing wide spread influence of the Gupta's.
Now from the line graph above it is clear that the economic performance of South Africa under President Jacob Zuma's rule has not been great. And we are afraid worst is probably still to come, but we will get to that in a bit. Looking at the above and calculating the average economic growth rate per president of South Africa since the dawn of democracy we get the following results. Table is ranked from the best performer to the worst performer.
President |
Economic growth rate achieved |
Thabo Mbeki |
4.1% |
Nelson Mandela |
2.7% |
Jacob Zuma |
1.8% |
Kgalema Motlanthe |
-4.1% |
As the table above shows President Thabo Mbeki oversaw the highest average economic growth rate achieved, beating the father of South Africa, Nelson Mandela. President Jacob Zuma coming in a distant third place with average economic growth rate of 1.8%. Poor President Motlanthe was caretaker president during the hart of the financial crises and served a very short term and growth under his caretaker leadership was -4.1%. But to be fair to him he couldn't do anything about the financial crises and the negative growth he oversaw would have fallen on President Mbeki if he was not recalled. If President Mbeki was not recalled and he remained president for the two quarters in which Motlanthe was caretaker, President Thabo Mbeki's overall average economic growth achieved would have been 3.7%.
So while it is clear that South Africa's economy is not in healthy shape, we predict that it will possibly get worse before it gets any better. And we will get into why we think so below.
South Africa's economy is largely consumer driven. I.e growth comes from consumers spending. If this slows, it has a significant impact on South Afica's economic growth. Lower spending, means less sales, means less needs to be produced which in turn lowers manufacturing which in turn leads to job losses as retailers, wholesalers and manufacturers start to cut jobs to save costs. This all leads to less business support services being required (think IT outsourcing, security, cleaning etc). And this leads to even further job losses. Less jobs means less consumer spending which just makes the economy go deeper and deeper into the rabbit hole.
So now that we know what kind of impact consumers spending has on the economy lets look at some of the numbers that is concerning us.
So while it is clear that South Africa's economy is not in healthy shape, we predict that it will possibly get worse before it gets any better. And we will get into why we think so below.
South Africa's economy is largely consumer driven. I.e growth comes from consumers spending. If this slows, it has a significant impact on South Afica's economic growth. Lower spending, means less sales, means less needs to be produced which in turn lowers manufacturing which in turn leads to job losses as retailers, wholesalers and manufacturers start to cut jobs to save costs. This all leads to less business support services being required (think IT outsourcing, security, cleaning etc). And this leads to even further job losses. Less jobs means less consumer spending which just makes the economy go deeper and deeper into the rabbit hole.
So now that we know what kind of impact consumers spending has on the economy lets look at some of the numbers that is concerning us.
Firstly the big news in Q2:2017 so far that was not there in Q1:2017 is the fact that South Africa has been downgraded to junk status after president Jacob Zuma removed former finance minster Pravin Gordhan from office and replaced him with Gupta friendly Malusi Gigaba. The graphic below shows SA's ratings history by Fitch, Moody's and S&P. With Moody's being the one agency that has never rated SA's debt as "junk"
While South Africa has been graded as "junk status" before and came out of it eventually, it did take a lot of time and strong economic growth in order for this to happen. Sadly being rated as "junk status"does affect investor confidence in a country, and as we showed recently with the decline in gross fixed capital formation, there is a clear indication that businesses (and to an extent government) has tightened their belts and are not willing to lay out massive amounts of cash now on acquiring or building fixed assets in South Africa. And GFCF is the backbone on which growth of the future would rest. And the decline in GFCF suggests that there wont be significant growth any time soon for South Africa. The graphic below shows the performance of GFCF (from 2011 up to end of 2016).
Signs are clear. Businesses and government and state owned enterprises (SOE) are all pulling up the hand brake when it comes to making strong investments in fixed capital in South Africa.
GFCF for Q1:2017 was published by Stats SA recently, but note the number is preliminary and is subject to revision. It did show a little bit of growth quarter on quarter annualised. But we know that fixed assets takes a while to generate any meaningful benefit in the economy. So lets assume it takes 6 quarters (18months) for investment in fixed assets such as roads, new buildings, equipment etc to show any benefits in the economy. Thus what happened to GFCF 18months ago affects the SA economy now. If we do that then the graph below shows what GFCF is predicting for the rest of 2017 and early 2018 for the South African economy.
So if we move current GFCF growth forward by 18 months it does indicate that South Africa has not seen the worst of it's current downturn just yet. Another variable that indicates that South Africa has not seen the worst of the current economic climate yet is the official unemployment rate. The latest unemployment rate of 27.7% for quarter 1 of 2017 must be extremely concerning for government and policy setters. With increased unemployment comes increased demand on government and NGO's and family and friends to care for those who do not have jobs (leading to less money available for spending elsewhere, which curbs consumers spending which in turn affects retail and wholesale sales), and in addition to this as the unemployment rate increases so does the crime rate, and as we showed in a earlier blog post, SA's crime rate is on the increase again. (See SA's crime stats here)
The line chart below shows South Africa's unemployment rate per province per quarter from the beginning of 2015. And the picture it is painting is not a pretty one at all.
Currently the Free State is sitting with the highest level of unemployment out of all the provinces in South Africa. With it's level of unemployment sitting at 35.5%. The Eastern Cape has the 2nd worst level of unemployment with 32.2% and Mpumalanga coming in in with the 3rd worst level of unemployment in South Africa with 31.5%. Sadly the masses flocking to Gauteng looking for work will in all likelihood be disappointed as Gauteng's unemployment rate now edging towards the 30% mark with it sitting at 29.2%.
Reason we are saying the unemployment rate will affect South Africa's future GDP growth rate is because more and more people are entering the job market, but less and less of them are finding jobs. They then depend on other to survive (be it family, friends or the state), and this all creates a drag as money that could have been spent elsewhere is no spent on assisting those who do not have jobs, and this has an impact on overall spending levels and therefore economic growth.
Though times ahead for South Africans and it's economy. Government policies seems to be failing miserably and kick starting South Africa's ailing economy. Perhaps they should read our page on how to get South Africa's economy back onto the path of strong sustainable growth. Read that page here.
Reason we are saying the unemployment rate will affect South Africa's future GDP growth rate is because more and more people are entering the job market, but less and less of them are finding jobs. They then depend on other to survive (be it family, friends or the state), and this all creates a drag as money that could have been spent elsewhere is no spent on assisting those who do not have jobs, and this has an impact on overall spending levels and therefore economic growth.
Though times ahead for South Africans and it's economy. Government policies seems to be failing miserably and kick starting South Africa's ailing economy. Perhaps they should read our page on how to get South Africa's economy back onto the path of strong sustainable growth. Read that page here.