Is a recession still coming in SA?

Now that South Africa dodged the bullet of a recession, it is not time to stop worrying about the economy. A local and global recession, where the local or global economy fails to grow for two successive quarters, is still on the cards.

Maarten Ackerman, chief economist at Citadel, warns that a local and global recession is not too far off although a few key industries delivered some hope of resilience in the first quarter of 2023. “The South African economy continues to take severe local and international strain as the world is likely to enter a recession.”

A recession is still possible even after Tuesday’s gross domestic product (GDP) data from Statistics South Africa showed that the country’s GDP expanded by a modest 0.4% in the first quarter after contracting by 1.1% in the previous quarter.

“Most sectors performed well but we need to remember it was from the low base of the previous quarter. The impact of rolling blackouts, South Africa’s dysfunctional ports and other systemic issues is clear once you consider the weak annual growth.”

ALSO READ: Sigh of relief as GDP grows by 0.4%, SA avoids recession

He says South Africa’s economy is already in a recessionary environment due to all the headwinds it faces. The local economy grew by only about 0.2% in the past year, putting pressure on social support and Citadel’s analysts foresee a low growth rate of less than 0.3%, for the rest of the year.

“Population growth is outstripping economic growth and for me it means we are already in a per capita recession.”

Strain on fiscal framework could bring recession

Ackerman says South Africa’s most pertinent challenges, including record high load shedding, over-budget wage demands from trade unions and the battered rand, put enormous strain on South Africa’s fiscal framework.

“Increasing gross fixed capital formation, for the sixth quarter in a row, remains a beacon of hope and a sign of private and public sector investment into the economy, including more renewable energy and residential and commercial construction.”

That sounds like a light at the end of the tunnel, but consumers are feeling the pinch.

“On the back of a poor global economic outlook and serious structural issues hampering growth in the country, South African consumers find themselves under severe pressure, facing lower take-home pay, high unemployment (the third highest in the world), high inflation and rapidly increasing interest rates.”

ALSO READ: Underwhelming GDP growth spells nothing good for rest of 2023

Ackerman is also worried about the battered rand.

“The country’s current account deficit has seen us pay more in foreign currency to secure our imports, placing the local currency under pressure. Global liquidity is also drying up as we see cracks developing in larger economies. Only when rates start to normalise, which we expect in the second half of the year, will the dollar come under renewed pressure and possibly boost the rand.”

Thanks to the rand’s woes, coupled with the no-growth environment the SA Revenue Service (SARS) will not be able to meet its tax collection targets, which will force Treasury to borrow more and increase the country’s debt-to-GDP ratios, affecting the local currency again, he says.

“This is especially concerning considering that the latest GDP announcement that showed government’s final consumption increased by 1.2%, which will put more pressure on the national budget.”

Geopolitical turmoil and SA’s friends

The severe geopolitical turmoil connected to Russia, Ukraine, China, Taiwan, North Korea and Iran also continue to be a cause for concern, especially now that the world is also taking a dim view of South Africa’s unpopular relationship with Russia and China, Ackerman says.

He warns that we should brace ourselves as the world faces a 90% chance of a global recession. “The overall current macro-economic picture is one of extreme uncertainty and volatility and shows a very strong chance of global recession in the near future.”

Citadel’s Recession Scorecard looks at 10 economic indicators for global recession and one of its most concerning current predictions is a greater than 90% likelihood of a US recession in the next 12 to 18 months which could trigger a global recession.

ALSO READ: Rubbing shoulders with Russia could be catastrophic for SA’s economy

All 10 of its indicators show red or yellow flags at the moment. “The biggest red flag for us is the US’s inverted yield curve, which is the difference between long- and short-term interest rates,” Ackerman says. 

Citadel’s analysts foresee the US experiencing below capacity growth for the next three years, as the cost-of-living crisis in the US hits consumers hard. Ackerman says this will have a knock-on effect in Europe, where the European Central Bank is very concerned about the EU’s inflation numbers.

The Bank of England also predicts a UK recession. Only China is showing real growth, but Ackerman says this is not enough to save the global economy from recession.

“Given that central banks are committed to bringing down what is very sticky inflation and that the cracks in the system are already starting to show, we must prepare ourselves for a difficult economic environment over the next few quarters.”

Red flags for recession

The International Monetary Fund (IMF) also recently published a report flagging three factors indicating an imminent global recession, namely the effect of rising interest rates on the US property market, cracks in the real economy coupled with liquidity issues in the banking sector and job losses in the US, which is usually a sign of global recession.

Ackerman says peak inflation, peak interest rates and the peak dollar are all playing out on the global economic stage, but with greater uncertainty caused by the recent shocks in the US and European banking systems in the foreground.

“This is not surprising, as you cannot expect central banks to normalise monetary policy as quickly as they did without some sort of fallout.”

However, Ackerman and his colleagues believe that we have reached peak inflation and we are turning a corner, although it is happening slowly. “It is still going to take the central banks a while to bring inflation down to their target levels. Increased interest rates and the cracks in the financial system will put growth assets, like equities, under pressure.”