Recession is alarmist talk, says treasury
July 10, 2008
By Nontyatyambo Petros
Johannesburg - Economists yesterday poured scorn on projections that the economy could slip into a recession before the end of the year, while the treasury dismissed such predictions as "jumping the gun and alarmist".
After international ratings agency Moody's warned on Tuesday that the local economy could be heading towards a recession, treasury director-general Lesetja Kganyago told Business Report: "Moody's is predicting a growth rate of 3.2 percent for this year and 3 percent next year. Going by their own projections, a recession is then arithmetically impossible … It is not backed up by their own numbers."
Moody's warning came after Cees Bruggemans, First National Bank's chief economist, predicted that South Africa would follow the US, UK and New Zealand into a recession, which is classically defined as two consecutive quarters of negative growth in gross domestic product (GDP).
Kganyago acknowledged that growth had tapered off "significantly" in the first quarter, when GDP grew at an annualised 2.1 percent - the slowest rate in six years.
"Consumer spending is down, [business] confidence is down, but there has been a rebalancing in the economy from consumption to investment," Kganyago said.
The economic boom of the past few years was largely driven by consumer spending.
Kganyago attributed lower output mainly to electricity supply shortages, which had a devastating effect on industry. Because there had been no blackouts in the second quarter, he said, a recession was even less likely.
Several economists interviewed agreed that a recession was not on the cards, although they expected economic growth to slow this year.
Mike Holland, an economics lecturer at the Gordon Institute of Business Science, said state expenditure on infrastructure, with private sector investment on capital projects, would keep the economy in positive territory.
The country would buck the global recession trend because of building for the soccer World Cup, Transnet's investments in ports and pipelines, Eskom's extensive capacity expansion programme, as well as big road construction projects, he noted.
Brait economist Colen Garrow said that in addition to the "most ambitious" infrastructure spending in the country's history, strong precious metal prices would help cushion against a recessionary trend. The services sector would also pull up GDP growth, he added.
This view was supported by Goolam Ballim, the chief economist at Standard Bank. "South Africa is losing momentum sharply" but it was unlikely to produce 0 percent or weaker real growth in the near future.
Ballim said there was capacity for the public sector to inject a cushion during the tough episode. This could include providing tax relief and increasing allocations to social grants.
Some economists pointed out that certain sectors were in a recessionary phase, but this phenomenon was not expected nationwide.
Garrow noted that mining was in a recession, after contracting 1.7 percent in the fourth quarter of last year and 22 percent in the first quarter of this year. Manufacturing also took a knock in the first quarter.
Holland said consumer durables and manufacturing were being squeezed.
Kganyago would not be drawn on whether 4 percent growth would be achieved this year. "It's too early to tell, but we are sticking to the target."
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