The standard definition of a recession is that it entails at least two consecutive quarters of negative economic growth or declining GDP. However, an exclusive focus on total GDP may hide important differences in the way different sectors of the economy are experiencing the downturn in economic conditions.
The current recession is no exception and there are marked differences in the way different sectors are experiencing the contraction in terms of its severity and duration. To date, the economy has been contracting for three consecutive quarters, with total GDP declining by 2,9% from its peak. The table below summarises the diversity in the experiences of the different sectors as distinguished in the official statistics.
Sector
| Number of consecutive quarters of negative growth up to Q2 2009
| Decline in GDP from peak
| Number of negative quarters since beginning of 2007
|
|---|
Agriculture, forestry and fishing
| 2
| -5,3%
| 2
|
Mining and quarrying
| 1
| -8,2%
| 7
|
Manufacturing
| 4
| -16,3%
| 6
|
Electricity, gas and water
| 3
| -3,0%
| 6
|
Construction
| 0
| n/a
| 0
|
Wholesale and retail trade, hotels and restaurants
| 5
| -4,5%
| 5
|
Transport, storage and communication
| 2
| -0,7%
| 2
|
Finance, real estate and business services
| 2
| -1,2%
| 2
|
General government services
| 0
| n/a
| 0
|
Personal services
| 0
| n/a
| 0
|
Total GDP
| 3
| -2,9%
| 3
|
The table leads one to the following conclusions:
The fact that important sectors such as the wholesale and retail trade, hotels and restaurants and manufacturing have been in recession for more than three quarters confirms that the South African economy was already in a significant downswing prior to the negative turn in the global economy in the last quarter of 2008.
Wholesale and retail trade, hotels and restaurants have been in recession the longest, viz. five quarters. This sector is naturally very sensitive to movements in interest rates and was negatively impacted by the tightening in monetary policy that started in June 2006. It was the sector that benefited most from the debt-financed consumer boom that commenced in 2004, but it was also the sector that bore the brunt of the inevitable slowdown when the household debt burden reached its affordability ceiling.
The manufacturing sector has been in recession the second longest, with its woes being compounded by the sharp contraction in global demand on top of already weak domestic demand. It is also the sector that has suffered the worst decline in value added of all the sectors (almost 80% of the decline in GDP during the last three quarters is accounted for by manufacturing). But in spite of this it is only fourth in line after agriculture, mining and transport as far as the reduction in its labour force is concerned. As in many other countries, the motor industry led the recession in the manufacturing sector.
As one would expect, general government and personal services did not show negative growth, but the fact that the construction sector achieved the same feat despite a sharp decline in building activity in the residential sector shows just how beneficial the government's infrastructure drive and the preparations for the 2010 World Cup have been to this sector. However, the construction sector needs to ask itself how it is going to adapt to the inevitable fall-off in public sector activity in future years. Stronger construction activity in the private sector could in time replace public sector demand, but one can definitely not rely on a smooth transition.
The last column of the table gives an additional perspective in also looking at conditions prior to the official onset of the recession. It shows the number of quarters, although not consecutive, out of a total of ten during which each sector has recorded negative growth since the beginning of 2007. Apart from illustrating the problems faced by the manufacturing sector (negative growth 60% of the time), it highlights the sustained contraction in mining production in recent years (negative growth 70% of the time), while also reflecting Eskom’s struggle to maintain power generation.
Perhaps more importantly, it raises the question of whether the real issue in sectors such as manufacturing and mining is not perhaps structural weakness rather than cyclical weakness.
The mining sector is clearly in a secular downswing and this is not just as a result of the fact that the sun is gradually setting on the gold-mining industry. South Africa's mining production including gold is currently 21,5% less than at its peak in January 2005, but even if gold is excluded it is 18% lower. And this in spite of the sharp rise in the demand for commodities from 2003 to 2008.
The manufacturing sector reflects South Africa's international competitiveness the best and the contraction in this sector is perturbing. According to the latest competitiveness index of the Institute for Management Development in Switzerland, South Africa is currently ranked 48th out of 57 countries – down from 37th position in 2005 and 39th in 2003.
The current level of manufacturing production is about the same as four years ago, but even at its peak in the second quarter of 2008 it was only 25% higher than the lower turning point of the cycle in Q2 2003. During the same period world trade in goods increased by 53%, and goods exports of emerging and developing countries (excluding oil producers) increased by 97%.
The post-crisis global economic environment will be less friendly than in the period 2003 to 2008. Will South Africa be able to meet the more serious challenges this will bring? Can the country afford to push aside its strategic thinking while trying to mitigate the short-term consequences of the recession?
