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- By: Cheryl
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He said the economic contraction was “disappointing but not disheartening”, adding that his administration was “finalising a stimulus package that will be announced to inject impetus and growth in our economy at a number of levels”.
Finance Minister Nhlanhla Nene said the country was pinning its hopes of recovery on an economic reform package that the Cabinet was drafting.
“South Africa will need to make much more strenuous efforts to break out of the ‘low growth trap’ into which a recession has now pushed it,” said Raymond Parsons, a professor at North-West University’s Business School.
“The economy desperately needs a jumpstart,” said Michael Ade, chief economist at Steel and Engineering Industries Federation of Southern Africa.
Tanya Cohen, CEO of Business Unity SA (Busa), said: “South Africa’s slide into a technical recession … is a timely warning and a reminder for the country to get its economy in order, failing which it will lose its only investment-grade rating.”
During his campaign for the ANC presidency last year, Ramaphosa put growth for 2018 at 3%, while earlier this year Goldman Sachs had forecast local growth in 2018 to be at 2.3%.
However, most economists are now forecasting that South Africa’s economy will grow by between 0.5% and 1% – down from between 1% and 2% at the time Ramaphosa became president in February.
For ordinary people, a recession means job losses as companies scale back to maintain their profit margins and reduce investment.
This means higher unemployment and more people on social grants. And, more people are likely to default on their microloans, car loans, mortage bonds or credit cards. For those who are employed, a recession means potentially little or no pay increases or bonuses.
This comes amid an official unemployment rate of 27.2% and is set to boost South Africa’s ranking as the world’s most unequal society.
The local recession means that, on average, South Africans will be poorer on a per capita income basis for the fourth consecutive year in 2018.
The news about the recession will be bad for government finances too.
Ahead of the medium-term budget policy statement, which lays out government’s fiscal plans and will be delivered by Nene in October, Citadel economist Maarten Ackerman said: “Treasury will need to find ways to fund items not budgeted for in February, such as above-inflation public-sector wage increases, National Health Insurance and President Ramaphosa’s economic stimulation package.
“This means that it is going to be extremely difficult for government to remain within the budget targets and keep ratings agencies happy,” Ackerman added.
Further slippage
BNP Paribas economist Jeffrey Schultz said: “October’s medium-term budget looks set to highlight a further slippage in deficit and debt metrics on a weak economy and poor revenue buoyancy.
“Negative growth and a worse fiscal picture do not bode well for sovereign ratings. We see a good chance that Moody’s will change the outlook on its ratings to negative on October 12.”
Ratings agencies S&P Global and Fitch already have the South African government rating on subinvestment grade, while Moody’s Investors Service is the last of the big three agencies that has the country on the last rung of investment grade.
This week, Moody’s said: “This weaker-than-expected economic performance will exacerbate fiscal and monetary challenges, a credit negative.
“On the fiscal side, we had already anticipated the government would miss its fiscal targets this year due to low tax performance, higher-than-budgeted interest payments and the wage bill.”
-Fin24