The global financial crisis has wreaked havoc and it appears to be the most popular subject to read about. Since everyone is talking about it daily, I might as well look at why this is such a hot topic and whether indeed SA is in a recession.

To get the technicalities out of the way; for SA to be in a recession it requires for there to be two consecutive quarters in reduction of the gross domestic product (GDP). This has not happened in 17 years until now.

In the 4th quarter of 2008, SA’s GDP dropped by 1.8%. This was the first drop in a decade. This is what brought about the alarm bells that SA may have been heading for a recession if the first quarter of 2009 showed another contraction as well.

In the 1st quarter of 2009, the SA economy is expected to contract following The Reserve Bank governor Tito Mboweni’s, comments in the past week that this would be the case. As governor, his view is held highly as he is responsible for the monetary policy in this country.

Some people blame him for his late reaction in decreasing the interest rates when the local and global economy had already started showing signs of a slow-down last year. Some economists expected for him to have been more proactive by reducing interest rates before SA was in a recession, instead of only gradually reducing rates now when the economy is officially in recession.

For those who don’t believe in this technical view of a recession, I suppose the reports that have been raised that SA has shed 200,000 jobs would be a more convincing argument that a recession has hit home. And I suppose this is more evident when one looks around their work and home areas, and looks at the number of dealerships that have had to close down. I can easily think of five or six that I drive by regularly that have closed shop. The reason I point out vehicle dealerships is that the motor industry appears to be the industry that has been affected heavily by a slump in new vehicle sales, as people defer purchases of motor vehicles when times are hard.

The other point is looking at your own personal situation and whether you are considering buying a new vehicle anytime soon? I bet you 7 out of 10 people may even be thinking of downgrading their vehicle, which shows you why this industry has probably been hit worst in this recession.

Reading the Business Day this past week there was an interesting discussion on the recession in SA. They quoted Moody’s rating agency as having said that “the recession would be brief and the economy would grow as early as the third quarter this year due to government spending and the lower interest rates.” This makes sense as government spending at the right level does stimulate the economy; look at the United States’ trillion dollar bailout for instance.

Moody’s statement doesn’t stop anyone from asking the question as to whether the view held by some economists, that, had Tito been more proactive and started cutting interest rates more aggressively especially before the economy started to shrink we may have escaped this recession. The government spending was always public knowledge due to the massive infrastructure investment that has been occurring. A quick look at the major airports, roads and stadia would have indicated that at least government has performed its part in trying to keep the economy out of a recession. The future spending planned by Eskom and planned housing project by the new government indicate their commitment to spending. However interest rates were still high as late as last year and today they are still on their way down! Some reserve banks in developed nations have already cut down their rates to near zero, looking at the UK for example. I am not saying interest rates should now be near zero in South Africa, as our inflation is different to the UK, but the rates should have bottomed by now. Maybe the obsession with inflation-targeting by the SA Reserve bank was not the solution needed especially when the country was facing the prospect of a recession last year. I am sure COSATU would agree here. There should have been an earlier change in strategy especially on the Reserve bank’s side.

The Business Report had an interesting view on the word recession. They applied this word in SA but from a personal experience perspective. What they found is that each person in SA has looked at their personal situation and changed their behaviour in response to the current economic climate. They looked at the poor, the young and the rich people in SA.

What they found is that the rich are not spending unreservedly as they realise now is not the time to spend, maybe rather a time to invest. Also I am sure to an extent, some, not all, would feel guilty spending on luxuries at a time when everyone else is struggling. The young were probably not as affected as they are constantly cash strapped anyway. The poor were struggling the most due to them having almost no luxuries to cut out and the inability to afford the basics as food is still expensive in SA (prices have not come down). Probably the 200,000 jobs I mentioned earlier would have been mostly lost at a low/unskilled level, a further indication why the poor have been hit the hardest in this economic climate.

Recession or no recession one has to look at their personal circumstances and evaluate if their spending patterns have shifted. Chances are they probably have, whether out of fear of losing your job or because indeed cash is now more difficult to keep in your pockets as the cost of living appears to be sticky downwards and the future cash inflow uncertain.

The current hope is that with confidence slowly coming back into the markets, banks confidence in lending growing, the continued government spending and the lower interest rates will help pull SA out of the economic downturn by end of this year. If not, let’s hope the world-cup next year can give SA a further increase in economic activity that is required to revive the flagging economy.

Have a good day.

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