Thuletho Zwane

South Africa is in a technical recession – it has been a long time coming.

Last Tuesday South Africa slipped into a technical recession as figures for the second quarter of 2018 showed there was a decrease in Gross Domestic Product (GDP) for April, May and June.

Statistics South Africa (Stats SA) reported that real GDP decreased by 0.7% in the second quarter of 2018, following a decrease of 2.6% in the first quarter of 2018. The report read that the largest negative contributors to growth in GDP in the second quarter were agriculture, transport and trade.

The report also said other industries that felt the pinch in Q2 include the transport, storage and communication industry. They saw a 4.9% decrease whereas trade, catering and accommodation also clocked a 1.9% contraction.

There were a number of reactions.

The country’s Minister of Finance, Nhlanhla Nene, said the government didn’t see the technical recession coming. However, they are working on a plan to finalise the structural reform package and a fiscal stimulus of R43 billion will be injected into the economy to help revive it, he said.

The country’s political opposition, the Democratic Alliance, believes structural reforms and a fiscal austerity package will “… get the economy’s heart beating again”.

Economist and Wits associate professor Chris Malikane explains a stimulus package is a package of economic measures put together by a government to stimulate a floundering economy. The objective of a stimulus package is to reinvigorate the economy and prevent or reverse a recession by boosting employment and spending.

A fiscal stimulus includes the increase of government spending. This would be when government undertakes big infrastructure development projects with the goal of employment. A monetary policy stimulus would be the lowering interest rates, the cost of borrowing, placing more money into the economy. Fiscal austerity would mean cutting down government expenditure and monetary policy austerity would be increasing interest rates to fight increasing inflation.

While attending the Forum on China-Africa Co-operation in Beijing, China‚ Nene said: “We didn’t think we would have the second contraction, we were hoping we would have a moderate recovery.”

He added that the weaker rand, which fell to a two-year low against the dollar, should help boost exports. “The South African currency is free-trading and acts as as a ‘shock absorber’ for the economy,” said Nene

The National Treasury is to present the fiscal stimulus and structural reforms to cabinet and will be announced in the mid-term budget on Oct. 24.

Malikane explains that “structural reforms” usually means getting the economy going in the following ways: Improving the governance of state-owned entities (SOEs); Increasing public-private partnerships; Introducing a strategic private sector partnership in SOEs – in other words, privatisation; reducing red tape that will make government payments to businesses more efficient; Improving the skills base of the country; Focusing on the country’s ports to improve imports and exports; Rooting out corruption and reducing government intervention in the economy.

These structural reforms are also central to the DA strategy of how to get the country out of recession.

DA leader Mmusi Maimane said the government’s “economic mismanagement and bad policy” were to blame for the technical recession and that the rising cost of living‚ as seen in petrol price increases‚ the VAT increase‚ sugar tax and income tax were signs of an impending recession.

Maimane said the government’s economic policies were eroding investor confidence.

To fix and jump start the economy, Maimane said the government needed to Introduce a fiscal austerity package to contain current spending and stabilise national debt at 50% of GDP. He added that any commitment to funding further revenue shortfalls should come from cutting wasteful expenditure and not through new taxes.

He said “reckless economic policies like the proposed nationalisation of the Reserve Bank and the undermining of property rights through expropriation without compensation” should be scrapped.

He added that Eskom’s monopoly should be ended and that cities should be allowed to purchase directly from independent power producers, increasing competition and lowering costs.

But economists disagree.

In an interview with African Leader Magazine, Malikane said there was no link between structural reforms and economic  growth in the short term.

“Even if there was a link, there is zero chance of them increasing economic growth in the short term. structural reforms would not  address the economic crisis in the short term,” said Malikane who predicted the recession two years ago.

Referring to his study Profitability and Crisis in the South African Economy. Malikane said South Africa was a capitalist economy and the driving force of a capitalist economy is the rate of profit. The study found that in 2012, the South African economy entered a new and on-going crisis of overproduction of capital characterised by stagnant profits and prolonged overaccumulation, which makes it impossible for economic growth to recover.

He concludes that fiscal austerity would however mean that public spending on meeting the needs of the working class may have to be curtailed, which may lead to a political crisis. The other alternative is to adopt expansionary scal policy through deficit spending.

To understand how South Africa got into this technical recession, one must consider the country’s economic performance over the past ten years.

The current economic crisis is a result of dismal economic growth between 2009 and 2016. Between June 2006 and June 2008, SARB increased its repo rate by 500 basis points to 12% while most central banks in the world cut key policy rates in the wake of the global financial crisis. GDP fell by 1.5% in 2009. There was a R70-billion revenue shortfall and the budget deficit rose to 4.5% of GDP. Following this, between December 2008 and March 2010, the economy shed a million jobs as employment fell to 13.8 million from 14.8 million.

The International Monetary Fund (IMF) shows that by comparison, 153 emerging and developing countries grew by 2.9% in 2009.

The Reserve Bank cut its repo rate by 700 basis points between December 2008 and July 2012. There was a modest recovery as the economy grew by an annual average of 2.8% between 2010 and 2013. However, tighter monetary and fiscal policies since 2014 contributed to a slowdown in GDP growth to an annual average of 1.1% between 2014 and 2016.

Between 2009 and 2016, GDP grew by an annual average of 1.6%. GDP per capita grew by just 0.4% a year, far lower than 153 emerging and developing countries, which grew by an annual average of 5% over the same period, according to the IMF.

The low GDP growth rates and the resulting reduced tax revenues have resulted in deteriorating debt ratios and downgrades by rating agencies. Between December 2009 and September 2017, unemployment increased by 3.4million to 9.4million.

The expanded unemployment rate rose to 36.8% in September 2017 from 29.5% in September 2008. The unemployment rate for black Africans was 41% in September 2017, according to Stats SA’s Labour Force Survey.

For the Economic Freedom Fighters (EFF) the technical recession can be squarely blamed on white monopoly capital.

EFF said that South Africa’s government, has since 1994 ruled in favour of market-led development.

“It is a basic neoliberal principle that the burden of economic development, job creation and poverty elimination is the responsibility of markets and captains of industry,” said EFF national spokesperson Mbuyiseni Ndlozi.

You cannot ask for market-friendly policies with a promise that you will get growth and jobs, and when these do not happen refuse to take the blame, he said.

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