Policy uncertainty will keep SA firmly in recession territory
The developments since the first quarter confirm that our recessions are linked to policy uncertainty
Much has been written recently about the economy having entered recession this year, which was apparently a surprise to some observers.
Yet those who follow the SA Reserve Bank — the institution tasked with dating our recessions — would know that we have been in recession since December 2013. While there were signs in the first quarter that the recession could be at an end, even then leading indicators of the business cycle were not unanimous in suggesting the start of an upswing.
A recession is a period of sustained deceleration in economic activity across most sectors of an economy. Typically, recessions are characterised by an actual decline in output and sales, but they need not be. The key feature of a recession is its momentum — economic activity continually weakens or remains weak. This is why the Bank already identified the current recession as having started at the end of 2013.
We need to avoid thinking of the recession as unexpected and/or caused by international factors beyond our control
The SA business cycle has passed through a decade of unfamiliar territory. We exited the post-crisis recession relatively quickly — by August 2009 — only to enter a weak business cycle expansion. According to the Bank, this ended in December 2013.
As the current recession did not follow an exuberant period of strain on productive capacity or unsustainable demand growth in the economy, the usual sharp declines characterising recessions were absent. Instead, most indicators showed sideways, rather than clear downward, movements.
Already in early 2014, this strange behaviour led the late Cees Bruggemans — former chief economist at FNB and a frequent contributor to this newspaper — to suggest "suspending" talk of a cycle in SA. His point was that underlying societal shifts and uncertainty were behind the strange business cycle behaviour. Indeed, there is ample evidence that our five-year-old recession was and remains the result of businesses and households forced into, and remaining in, "wait-and-see" mode.
This uncertainty is most evident in private-sector investment, which is the key driver of a sustainable business cycle recovery. There is a wealth of literature that documents the impact of uncertainty. Recent research at Stellenbosch University suggests that up to 40% of the variation in SA investment expenditure can be traced to variations in business confidence in 1992-2017.
The developments since the first quarter confirm that our recessions are linked to policy uncertainty and its detrimental effects on investment and consumption decisions. While business confidence improved markedly at the start of 2018, pointing to improving economic conditions and an end to the recession, other leading indicators of the business cycle did not move, notably indicators of investment plans. But things took a turn for the worse in April with the introduction of new uncertainty driven by the expropriation without compensation debate.
Whether intended or not, the message SA households and businesses (not only farmers) received is that property rights are no longer sacrosanct. Residential and corporate investment (houses and buildings and agricultural investments) and durable consumption expenditure (car purchases) — all key parts of a sustainable business cycle upswing — have come to a halt. So much for the end of the recession.
Of course, other factors also play a role. The international business cycle expansion, at least the US expansion, is well developed and financial and commodity market developments have affected, and still affect, many of our sectors. This may naturally prolong the recession. But global factors cannot explain why we have been in recession for five years. Nor do they wholly, or even mostly, explain the reversal in conditions since the first quarter.
Understanding our recession to be much older — and related to heightened uncertainty, especially about policy direction — is also critical when considering the road ahead. We need to avoid thinking of the recession as unexpected and/or caused by international factors beyond our control. The business cycle effects of uncertainty, especially around property rights, are likely to be long-lasting. The problem is that the expropriation uncertainty does not constitute a transitory shock to business confidence, such as a sudden oil-price spike, weaker global conditions or rand depreciation. It rattles the framework upon which local economic decisions rely.
If there is a debate to be had about how the government should respond to this recession, it should be about how to urgently address ill-advised and incoherent policies that have pushed us into recession and continue to push us deeper into the mire.
• Boshoff is associate professor of economics and co-director of the Centre for Competition Law and Economics at Stellenbosch University.