Is the South African economy headed for a recession? This is a common question these days as people contemplate a bad economy, worse rand, job insecurity, insufficient electricity supply, strikes and creaking government finances.
But for all this talk about the dreaded “R” word, what is a recession really? And is it necessarily a bad thing?
The mainstream technical definition of a recession is two consecutive quarters of falling real GDP. This is a narrow, strict definition that is not always helpful. Real GDP might fall only 0.1% in each of two consecutive quarters, or it might plunge 3% in the first and third quarters, with a quarter of tepid growth in between. The first instance would be a technical recession and the second would not, even though GDP fell much further, over a more prolonged period than in the first example.
So getting too hung up on the technical definition makes little sense. Then there’s the issue of which unit of measurement of GDP to use. Real GDP is an estimate by Statistics South Africa of the gross domestic product measured in inflation-adjusted rands. But why not real GDP per person, or real GDP per person denominated in a global numeraire like the US dollar? If real GDP grows by 2%, but population grows by 3% over the same period, the average person may have gotten poorer. Could this not be considered a recession? As Zimbabweans found out, it’s no good if your GDP is rising when denominated in your local currency, but falling when denominated in global currencies.
But even without the issues of definition and measurement, recessions are not necessarily bad things. GDP is a big globular aggregate that tells us precious little about whether resources get allocated appropriately or whether growth is sustainable. After the collapse of the Soviet Union, Russian GDP fell by about 25% during the early 1990s. But this massive contraction did not mean that moving towards a more free-market economy was a bad idea; instead, it reflected the process of a more efficient reallocation of resources. In this instance, less was more.
In 2008 and 2009, most economies around the world experienced significant declines in GDP, heavy job losses, and financial panic. But was the recession the problem, or was it the symptom of having experienced too much debt-fuelled and unsustainable growth in the preceding years?
The question of whether or not a recession lies in store for South Africa is not only quite complex but isn’t even the right question. At the end of the day, what we care about is whether the quality of people’s lives is improving or not, whether their jobs or businesses are more or less secure, whether they have an expanding or contracting set of opportunities, and whether they have access to more or less choice. In short, we’re asking whether people are economically advancing on a sustainable basis.
Economic progress is not necessarily the same thing as GDP growth.
Is South Africa’s economy sustainably progressing? More specifically, is the median South African’s quality of life improving along with an expanding set of opportunities and choices? In truth, we don’t have the appropriate surveys to get an even remotely good handle on this (more on this important subject in a follow-up post). So we’re left using mostly crude aggregates. Faced with such inadequate measures, the best we can do for now is look at as much reasonably credible macro data as possible.
Moving beyond just “real GDP” suggests that the lack of progress in South Africa’s economy is glaring. Inflation-adjusted GDP per capita stagnated since 2007. Electricity production has fallen by 10% from the 2011 highs and is now at 2003 levels, which has proven insufficient for industrial expansion. Manufacturing output is the same in 2015 as it was in 2005, as is construction activity. South Africa’s official unemployment rate remains extremely high at 25% and the prolonged slump in the Solidarity-ETM Labour Market Index shows persistent job and wage insecurity since 2008. According to the World Bank, South Africa’s real dollar-denominated GDP per capita stagnated from 2008 to 2014, while Chile’s was up 17%, Malaysia’s 18%, Colombia’s 19%, and Botswana’s and Mauritius’s 21%.
People shouldn’t miss the (chronic economic slump) wood for the (technical recession) trees. While a technical recession in 2016 is highly plausible, we should open our eyes to South Africa’s prolonged stagnation and underperformance of global peers which threatens the very socio-political stability of the country itself.
But that doesn’t mean a technical recession is not to be feared. Technical recessions grab headlines because they’re highly marketable bad news. Politicians hate bad news and have a long and sorry history of responding to technical recessions with short-term stimulatory palliatives rather than long-term solutions.