NEWS

How Corruption And Political Instability Have Thrown SA Into A Recession

"Ongoing corruption and a sense of instability have reversed the gains."

07/06/2017 05:55 SAST | Updated 07/06/2017 07:53 SAST

For the first time since the aftermath of the global financial crisis, South Africa has entered a technical recession.

A release on the country's latest gross domestic product (GDP) figures by Statistics South Africa (Stats SA) on Tuesday revealed the economy has experienced two consecutive quarters of contraction, showing the economy has been on a sharp downward trend since late last year.

GDP shrank by 0.7 percent between October and December 2016 and a further 0.3 percent between January and March of 2017 compared with the previous quarters. Stats SA said large decreases in the trade, catering and accommodation industry as well as shrinking manufacturing mostly account for the dip into technical recession.

Economist Mike Schussler explains what we know so far:

1. How did this happen?
The root cause of this technical recession, Schussler said, is a "total loss of consumer and business confidence in South Africa".

"People are earning less relative to inflation, interest rates remain high and a negative outlook among business and consumers is slowing purchasing," he said.

South African manufacturing shrank, while catering, accommodation and trade have experienced sharp declines.

2. The reasons? Politics is at the centre of the recent slump.
Political and policy uncertainty along with perceptions of widespread corruption are significant contributors to the depressed mood of business and consumers in the country, Schussler said.

"We shouldn't have experienced a recession given large growth in South Africa's primary sector, namely mining and agriculture, during this same period," Schussler said. "When there is growth in this sector it usually boosts the economy significantly."

"Ongoing corruption and a sense of instability have reversed the gains. Business and ordinary citizens feel they are losing out in this economy while they see others, particularly in politics, benefit. This has a big impact on the economy."

Deep-seated structural blocks on economic growth, including high structural unemployment, inequality and low levels of productive investment in South Africa for decades, are more long-term impediments to a healthy economy.

3. Are we alone?
South Africa's economy is nowhere near worst off in the world in 2017, but its relative global position is dire, especially when compared with some of the other Brics nations :Brazil, Russia, India, China and South Africa.

Bloomberg's Misery Index, which combines countries' inflation and unemployment outlooks, ranks South Africa second only to Venezuela, whose significantly worse economic and political situation has left grocery stores bare and hospitals without medication.

Bloomberg

Schussler said world economic growth is increasingly "robust", while South Africa's economy continues to slump.

"The world is getting richer while South Africa is getting poorer. Economic growth and recovery in countries like the United States, central Europe, some emerging markets including India and China to some extent are driving this growth globally," he said.

The most recent edition of the World Bank's Global Economic Prospects said that despite "substantial policy uncertainty" around the world, as well as rising trade protectionism, the global economy is still expected to grow by 2.7 percent on the year in 2017 and even more in subsequent years.

4. What implications will the recession have for SA?
Confidence may continue to decline, Schussler said, as recessions make people more cautious to spend. "The South African Reserve Bank will also become more cautious," he said. The risk of further downgrades by credit rating agencies keeping a watchful eye on the country are also probable, he said.

For consumers, there is "a reduced likelihood of people finding jobs and fewer pay increases as companies cut budgets," he said. "This also takes us somewhat off the radar of both foreign firms and local firms that prefer to invest in economies that are already growing or on an upward trend," he said, implying the possibility of further declines in the economy if a more stable political environment is not achieved.

"Downscale your expectations," Schussler said. "For some people this will mean not being able to purchase new cars or visit restaurants as frequently, while millions of unemployed people in particular will struggle even more to find work."

5. Is there any good news?
What will happen in the second quarter of the year is not yet clear, but when commodities and agriculture go up as they have, money is likely to flow back into the country, he said. "The economy may yet experience a better second half of the year if our exports increase," he said.

"What makes me hopeful," he said, "is the exposure of corruption and political instability brought to the fore by media and civil society. This may help going forward as people show they are not willing to tolerate corruption and political chaos."

While South Africa has entered a technical recession after two quarters of contraction, growth compared with a year earlier was 1 percent at the end of the first quarter.