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By unknown | Feb 02, 2009 | COMMENTS [ 0 ]

Madoda Milazi

Madoda Milazi

Opinions are not only divided as to whether or not South Africa will enter recession this year but also on the length and severity of such a slowdown.

Finance Minister Trevor Manuel recently said that the country could avoid a recession this year.

Analysts expect the Reserve Bank's Monetary Policy Committee to cut interest rates by 100 basis point when it announces its decision on Thursday. This they say will go a long way to get consumers to start spending again and rescue the manufacturing and retail sectors, which have shown negative growth for seven months.

A recession is defined as two consecutive quarters of negative economic growth. Many economists, including those at Absa Capital, say that the last quarter of 2008 and the first quarter of this year will both show negative growth.

Christopher Gilmour, an analyst at Absa Investments, says the main driver of economic growth is consumer spending, which accounts for about 60 percent of gross domestic product.

"A large and visible component of consumer spending is retail sales. Retail sales growth has been declining for many months now, the latest print being -4 percent for November 2008," says Gilmour.

But retail sales growth is inversely correlated with prime rate. As prime rate falls, retail sales growth picks up.

"It's not unreasonable, therefore, to expect retail sales to improve during 2009, as interest rates fall. It's possible that this improvement in consumer spending will be enough to tip the balance between being in and being out of recession, but only time will tell," Gilmour said.

Craig Pheiffer, general manager of Absa Capital Private Clients, predicts that the last quarter of 2008 will show negative growth of -0.5 percent, while the first quarter of this year will post an even bigger -0.8 percent negative growth.

"It doesn't matter whether you call it a recession or an economic slow down, the fact is that growth in the manufacturing, mining and retail sectors has been depressed for some time now. These sectors have been shedding thousands of jobs and that will affect consumer spending," said Pheiffer.

Gilmour said if the economy falls into recession, it is likely to be shallow and short, only lasting for two quarters at most.

Many analysts forecast real economic growth of less than 1percent this year, down from last year's estimations of 3 percent.

Jaanre Fourie of Metropolitan Asset Managers says the first stimulus for consumer spending might come from the recent declines in the petrol price, which is now almost 20 percent lower than a year ago.


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