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Here we go again

October 12, 2018
1,896 Views

To the surprise of many economists, South Africa has once again entered a technical recession

Data revisions down the line may yet save us (although this can work the other way too, as the first quarter gross domestic product (GDP) outcome was down to -2,6 percent, from the -2,2 percent initially reported), but it is likely that we are entering the first technical recession since 2009.

The 2009 recession came at a time when the world economy had just crashed from the after-effects of the great financial crisis and the global contagion that had spread, leaving global demand very weak. This time around, the global economy is performing well, and growth in our major trading partners remains good.

What has changed since 2009? For one, policy uncertainty. Many in the economy hoped that under President Cyril Ramaphosa the poor decisions and corrupt activities of the Zuma administration would give way to sound economic logic and business-friendly proclamations, which would induce growth in the economy – the so-called “Ramaphoria”.

However, indecision and a continued lack of clarity surrounding issues such as the mining charter and land expropriation without compensation have continued to weigh heavily on production in the economy.

The latest Purchasing Managers’ Index (PMI) results and business confidence confirm that the sentiment from business and the manufacturing sector is negative. The result of this has been a reluctance to invest – and rightly so. Who would invest at a time when land expropriation without compensation still has yet to be clarified by the ruling party?

Our own analysis shows a strong amount of co-movement between the growth in fixed investment in the economy and truck sales.

To further compound the misery, the currency crises brewing in Turkey and Argentina have created a troublesome climate for emerging markets – even the rand was not spared weakness, and most recently dived to above R15 to the dollar. Of course, many in the industry will have taken note of the rising fuel price with much dismay.

In addition, there is a further problem looming in the not-too-distant future: the tightening of the repo rate. In recent times, the South African Reserve Bank has refrained from raising rates in an attempt to stimulate growth. While lower inflation allowed this, months of continued rises in the price of petrol has pushed inflation towards the upper band. The Reserve Bank may soon be forced to raise rates to curtail inflation, which is not ideal for a country hoping to improve the growth outlook ahead of the elections.

Does the logistics industry share a similar negative sentiment? From a macroeconomic perspective, transport’s contribution to GDP fell sharply, but freight income actually had a positive result, leaning on the positive performance of the mining sector.

However, domestic producers are likely to face difficult times ahead, with the rand pushing the costs of running fleets and components up, while the economy has little room to take on higher end costs. Those operating on sweated assets may find themselves in a difficult situation if the weakness in the economy continues, and costs continue to tick up.

SAM Rolland is an automotive and transport economist at Econometrix. He is responsible for writing the Quarterly Automotive Outlook at Econometrix, as well as commentary and analysis on vehicle sales and transport price drivers. Prior to joining Econometrix, Rolland spent a number of years as an economist for the National Treasury of South Africa. He has also worked at Bloomberg New Energy Finance as a research analyst in conventional power.

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