A Time for Leadership

By Steven Crouse

Earlier this week Stats SA reported on the GDP growth figures from South Africa in the 2nd Quarter of 2018, showing the economy being in recession.

While there are numerous media headlines on precisely what this means, I have compiled the following 3 simple thoughts to assist you in understanding just what lies behind the term “Recession”, and the impact of this on your finances and investment portfolio.

  1. There is no such thing as a “technical recession”
    A country is either in recession or it is in an expansion. There term “technical” is a media term and does not form part of any economic lexicon.
    A recession is defined as two consecutive quarters of GDP contraction – a scenario  where the total value of goods and services traded is lower than that of the period before. Q1 and Q2 of 2018 were two such quarters for our economy so, yes, we are clearly in recession.
    But as per the image below, there is more to the headlines of negative GDP to this story…a3TKwUqlcrsuscMUMzPW2N84EbfJ0UNOhA

While the economy shrank in the second quarter of the year, on a year-on-year and a 6 month-on-6 month basis, the Real GDP of the country is still showing positive growth.
Of similar importance is that these figures are those for the 3-month period ending on the 30th of June – it is now September, and the picture looks vastly different already. (do read on about the leading indicator below…!)

  • What contributed to the negative GDP in Q2?

 

The 0,7% downturn in the second quarter of 2018 was a result of a fall-off in activity in the agriculture, transport, trade, government and manufacturing industries.Mining, construction, electricity, finance and personal services experienced positive growth, but not enough to lift overall economic growth out of negative territory.
Agriculture production fell by 29,2% in the second quarter of 2018, following a 33,6% slump in the first quarter. This was largely driven by a decline in the production of field crops and horticultural products. Continued drought conditions in Western Cape and a severe hailstorm in Mpumalanga, resulting in extensive crop damage, also placed additional pressure on production in the second quarter. (Land redistribution and the talk of EWC are not regarded as having contributed to this contraction).
The transport industry contracted by 4,9%, largely a result of decreased activity in both land and air transport. Industrial action within the industry, combined with a decline in freight transport, contributed to the slowdown. While Government activity decreased by 0,5%, this was largely as a result of falling employment numbers in the civil service (very much a positive, given the bloated civil service!)
The trade industry experienced its second consecutive quarter of negative growth, falling by 1,9%. Subdued sales in both motor and retail trade contributed to the decline. South African households spent less on products such as transport, food, beverages and clothing.
Manufacturing was the third industry to record a second consecutive quarter of negative growth, following in the footsteps of agriculture and trade. Manufacturing activity fell by 0,3%, driven by a fall in the production of electrical machinery, transport equipment (including motor vehicles), and products within the furniture and ‘other’ manufacturing division.

 

  • The Leading indicator
    A country’s leading indicator is regarded as the most accurate forward indicator of expected economic activity. As at the last available figures (July 31st), the RSA Leading Indicator has continued its upward trajectory. Bearing in mind that this is a forward-looking indicator, it did predict this recessionary environment, but has turned markedly positive since.
    tbG1m0in3GFkHbaDDZNNpF-Ivc6UXNfRJw

 

This second graph overlays the leading indicator with GDP, and the correlation (albeit lagged) is evident across the entire series, dating back to 1972.
But it is the upward tick at the far right that is the silver lining in this story.
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In summary, while the headlines do paint a bleak picture on the state of our economy in the second quarter of the year, the efforts thus far to turn matters around are beginning to bear fruits. It is important to remember that markets are forward-looking, not backward. And although the currency shot to multi-year lows this week, the drivers of this are not entirely domestic only. Other Emerging Markets (Turkey, Argentina and Nigeria) contributing to a “risk-off” environment, have added fuel to the fire and the weaker climate for us.

Overall, Global Growth remains above trend and the buoyant conditions should contribute towards South Africa’s economy improving on the back of policy reforms and growth-oriented policy – a welcome change from the numerous “own goals” of the Zuma-era.