South Africa: South Africa: Country's in a Recession

South Africa has been rocked by news that it has slipped into a recession next its gross domestic product (GDP) declined 0.7% during the initial quarter of 2017 next contracting by 0.3% in the fourth quarter of 2016. Jannie Rossouw explains what it means.

What is a technical recession?

It's at the same time as an economy suffers two consecutive quarters of negative economic performance. It refers to shrinking economic output, sometimes as well known as negative economic increase or economic decline.

In short, it implies that the economic activity of a country is declining. This is at no time a good thing. In South Africa's case it's particularly critical because the country needs strong economic increase to make inroads into unemployment, which currently stands at additional than 27%.

South Africa desperately needs a strong economy for other reasons two. The initial is that the living standards of its citizens can't improve without economic increase. The second is that the economy needs to grow for the government to be able to increase revenue to meet its growing social welfare budget.

There are other ways to describe a recession, although the technical definition is one that's generally accepted. Other definitions include "an economy performing below potential" or "an increase in the output gap". As an aside, it's interesting to note that there's a technical definition for a recession, but no agreed definition for a depression (as in Great Depression of the 1930s).

South Africa's economy showed marginal positive increase for 2016, although it again contracted in the fourth quarter of the year. With similar contraction in the initial quarter of 2017, the country entered a technical recession.

If the economy shows positive increase for the remaining three quarters of this year, South Africa will avert a recession for the schedule year 2017.

What caused it?

Economic activity contracted over a wide range of sectors, inclunding construction, manufacturing and transport. Only mining and agriculture made a positive contribution to output increase. All other sectors contracted.

This reflects subdued request throughout the South African economy. The data on the initial quarter confirms what a lot of small and medium business owners have been saying since the beginning of 2017 - that request is down and that business conditions are tough.

The significant question is whether this recession will continue in the second quarter - April to June, or whether there will be a turn around to economic increase.

Who's to blame?

It's difficult to say who is to blame. But it must be noted that recessions are rare events, as policies are generally aimed at economic increase. This is the second recession experienced in the post 1994 South Africa.

Rapid economic increase depends on investment , which in turn is dependent on confidence and positive expectations of the country's next. President Jacob Zuma's government doesn't instil confidence. This half explains subdued investment . The recent credit risk downgrades into sub-investment grade has made South Africa a less attractive investment destination.

The lack of confidence is as well reflected in suppressed request, which in turn results in contractions in economic output.

How do we get out of it?

Investment is required to get South Africa out of its depressed economic conditions. Investment will boost request in the economy, with positive spill-over effects into a number of sectors.

Naturally restoring South Africa's credit risk rating to investment grade would help boost investment . A better credit rating would reduce the risk of investing in the country.

The upcoming credit rating decision from world credit rating agency Moodys' is going to be a critical moment. This next two large rating agencies Fitch Ratings and Standard & Poors downgraded some of South Africa's instruments into sub-investment grade. A downgrade from Moodys' will trigger massive capital flights which will exert further pressure on the economy.

What company are we keeping? Are other nations in the same boat at the moment?

South Africa is joining a growing inventory of nations which have slipped into technical recessions. These include Ecuador, Equatorial Guinea and Venezuela. It's significant to remember that a country's status can change from quarter to quarter depending on its increase rate. This means that an assessment of economic increase or recession status needs to be made based on the majority recent data.