South Africa is heading towards a recession, but this should be considered in the context of nine years of sustained growth.
There are impacts in five areas that need to be considered before a recession becomes a reality in South Africa however, and according to Dave Mohr, chief economist at Citadel, these are a world recession; a commodity price collapse; a capital flow shock; debt deflation and inflation.
Mohr says that there is little dispute that the USA is in a recession already. The question really is whether the rest of the world will follow the United States down that ‘recession’ road.
He contends that, based on the fact that the emerging markets export in the region of 60% of their industrial production to the developed world, and the fact that the emerging market accounts for 40% of the real US dollar purchasing power, the world is very close to recession.
In terms of commodity prices, Mohr says that while these prices are still buoyant, it may be an artificial buoyancy, buoyed instead by hedge fund managers and pension funds that see commodities as an investment opportunity, and not from increased demand from countries.
On the question of capital flows, the relative size of these capital flows is destabilizing, either on it entry into a country or as outflows, and could in some instances account for as much as between 8% and 10% of the South African economy.
Debt deflation is the fourth component, and Mohr maintains that a common mistake is to compare the country’s consumer indebtedness with that of developed countries. This is dangerous as consumers in developed countries earn significantly higher salaries. Added to which developed world consumers generally have assets that can be used to back-up their debt.
Mohr maintains that the country is closer to a recession than is generally thought, specifically as inflation expectations are being ratcheted up, with chief economist at The Efficient Group Dawie Roodt suggesting that the country will only return into the 3%to 6% inflation-targeting zone in 2010.
All the business and confidence indicators are down, business confidence has dropped, passenger vehicle sales are down, house prices have turned negative, retail sales have collapsed.
The FNB/BER consumer confidence index (CCI) from FNB and Stellenbosch University’s Bureau for Economic Research (BER) shows that consumer confidence declined by 10 index points, from 22 during the fourth quarter of 2007 to 12 during the first quarter of 2008. This is the biggest drop in four years.
Mohr suggests that there may be a recession within the next two years but he goes on to say that this would be a typical adjustment, after a long period of growth, as it has been nine years since the country’s last recession.