Recession is not likely yet, says Marcus

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IOL pic jun10 gill marcus Independent Newspapers South African Reserve Bank Governor Gill Marcus. File picture: Simphiwe Mbokazi

Johannesburg - The Reserve Bank did not believe a recession was likely, despite the latest economic contraction, governor Gill Marcus said yesterday.

Marcus told a business breakfast of the SA Institute of Chartered Accountants in Johannesburg that even if the economy recorded zero growth in each of the remaining three quarters of the year, it would still achieve positive growth of 0.8 percent for the year.

“To get to a negative growth rate in the second quarter, and assuming the rest of the economy continues to grow at rates of around 2 percent, we would have to have significant further contractions off the already low bases in both the mining and manufacturing sectors, and such contractions would have to be of similar orders of magnitude as in the first quarter.

“Given that the platinum strike covered more than two months of the first quarter, it is unlikely that a further contraction of that order of magnitude will occur in the second quarter. Therefore, we do not believe that a recession is the most likely outcome.”

The economic slowdown was domestically driven, largely self-inflicted and external factors alone could not be blamed.

“This does not mean, however, that solutions are in our own hands, and as a country, instead of focusing on whether we are entering a recession or not, we should all be striving to restore the economy to the strong growth path that it is capable of achieving,” Marcus said.

She said the 50 basis point interest rate increase in January was not a one-off move and was part of a necessary cycle to deal with inflation risks and to normalise the interest rates in the economy.

“That means the interest rates will not necessarily be adjusted at each [monetary policy committee] meeting or move by the same amount.”

Other economists agreed the recession call was too early.

“It is all semantics whether we are in a recession or not. With the platinum mining strike and the threatened strike by the National Union of Metalworkers of SA, we may well have a recession by the end of the year,” Econometrix chief economist Azar Jammine said.

Johannes Khosa, a Nedbank economist, could not dispute what Marcus said because the growth data still had two months in the second quarter.

“We can still see a pick-up in numbers although there are mixed views on what the numbers are showing. The purchasing managers’ index came below 50 points and some analysts believe we are already in a technical recession,” he said.

Marcus said while the strike had already been felt in the economic growth outcome, it had not been fully reflected in the export data because platinum producers had enough inventories of the metal. However, these were being depleted, and the longer the strike continued, the sooner the adverse effects on exports would be felt.

She added: “The deficit on the current account of the balance of payments is often regarded as the Achilles heel of the South African economy, particularly in the light of a relatively slow export response to the rand depreciation. Some tentative positive signs in this respect were evident late last year, with the deficit contracting from 6.4 percent of gross domestic product in the third quarter to 5.1 percent in the final quarter.”

She said a number of looming strikes in other sectors also threatened economic growth. Nevertheless, unless these stoppages turned out to be far worse than anticipated, the Reserve Bank’s base case remained one of positive growth this year, although it might be difficult to achieve.

Peter Attard Montalto, a research analyst at London-based Nomura, said the language by the bank around the current platinum strike and the risk of further strikes in other areas of the economy this year seemed to be becoming more blunt.

“The tone is verging on exasperation in our view, and comments point to that fact that the [Reserve Bank] is now almost discounting or looking through this impact, given what is currently going on with inflation,” he said.

Marcus said that unfortunately, monetary policy had a limited role in kick-starting the economy, particularly given the causes of the slowdown. The 50 basis points increase in the repo rate in January simply offset the recent hike in actual and expected inflation.

“The recent slowdown is clearly related to a fractious labour relations environment, while the unemployment rate is primarily structural in nature, and not something monetary policy can solve,” she said.

Marcus confirmed that a 25 basis point adjustment was a possibility.

She said the economy contracted an annualised 0.6 percent in the first quarter, largely from the decline of 24.7 percent in mining and 4.4 percent in manufacturing. The rest of the economy, excluding the two sectors, recorded growth of about 2 percent, and while at least positive, was still inadequate. This followed a disappointing growth outcome of 1.9 percent last year, following more optimistic expectations earlier on in the year. - Business Report



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