Following reports the South African economy had contracted by 3.2% in the first three months of 2019, global credit ratings agency Moody’s is expecting yet another recession.
It is often said that an economy has entered a recession when the gross domestic product growth rate is negative for two consecutive financial quarters.
However, the official definition is when an economy declines significantly over six months.
In either case, South Africa is in danger of yet another economic recession less than nine months after the country’s last one.
“Weak survey data suggests the odds that the economy may experience another technical recession in 2019 are high,” Moody’s revealed in their Global Macro Outlook.
Not all doom and gloom
The good news is that Moody’s are quietly confident about the moves President Cyril Ramaphosa is making towards fixing the economy and predict South Africa will recover through 2019.
“The task of reviving the economy will be challenging and reforms will take time to show effects. We expect a gradual pickup in real GDP growth in 2019, but we expect continued lackluster momentum,” Moody’s continued.
Recession good news for lenders
Believe it or not, there could even be a plus side for people borrowing money as Moody’s is expecting the Reserve Bank to cut the repo rate in order to support the faltering economy.
“With the ANC winning the election with a clear majority under the leadership of President Cyril Ramaphosa, there are hopes of a renewed push for structural reforms aimed at igniting growth and reducing unemployment, which stands at 27%,” Moody’s statement continued.
The repo rate is effectively how much the Reserve Bank charges commercial banks to borrow money, which in turn affects how much consumers are charged for taking on credit.
While a decreased repo rate is good for getting cheap credit, it is important to remember other impacts it can have on an economy, such as increasing inflation, which will definitely not help people during a recession.
Investment rating downgrade
Speaking to Business Live, Old Mutual Chief economist Johann Els believes that unless there are major changes to policy before Moody’s next assessment in November, the country’s investment rating is likely to be downgraded even further.
“If there is no serious policy reform between now and November when Moody’s has to come out with its decision again, then there is a decent chance that Moody’s could downgrade the outlook statement of SA from stable to negative,” he said.
“The economic data has been so weak and volatile that it is quite possible that we may experience a recession, but the more important point is that growth is very weak.”