ANDREW GOODALL: Things are bad but they could be worse

Erwin Schrodinger could never have imagined his thought experiment involving a cat that could be simultaneously dead and alive, intended to illustrate a paradox of quantum superposition, would become quite the Swiss army knife it has. 

The experiment has given rise to multiple published interpretations and become quite the pop culture chess game that is now even used by economists and market pundits to describe the situation in which we find ourselves today — simultaneously in recession and not in recession.

Right now it seems it really does depend on who you ask, and which metrics you are relying on. If we get back to basics, the strictest definition of a recession is two successive quarters of negative economic growth. This has historically been a pretty reliable, if slightly blunt, tool.

So, when in late September the official US scorekeeper, the National Bureau of Economic Research, announced that the world’s most powerful economy had shrunk for a second quarter in a row, it seemed fairly reasonable to call it a recession. 

Trouble is, this situation is unlike any that has come before. Usually two successive quarters of negative growth comes with declines in production, income, employment and spending. Think back to the Great Recession of 2009 — jobless numbers reached record highs, housing prices crashed, interest rates came down and the only thing staving off a full-on depression was a generous stimulus package. The phrase “too big to fail” became commonplace and government spent a fortune to ensure irresponsible and greedy bankers did not go jobless.

Post pandemic, and against the backdrop of the war in the Ukraine, we see rising energy costs that are helping drive inflation numbers not seen in developed countries in decades. However, jobless numbers in the US are actually down, and in many sectors there are more vacancies than candidates. Even though we have seen some of the biggest interest rate hikes in decades, the US housing market is still overheated, with property prices at record highs (falling in September for the first time since March 2012).

Unsurprisingly, the recently released US September CPI report was worse than expected. Since interest rates are too low to contain inflation — US consumer prices are at a 40-year high — the rate hikes are expected to continue, and are likely to be substantial. Ironically enough, on news of this the markets moved up instead of plummeting. 

In a recent article published by Bloomberg the writer described three key steps for surviving an economic downturn: be wealthy, have lots of money, and don’t be poor. On the strength of the dollar wealthy Americans can travel cheaper and splurge on luxury goods, while for the average person bond costs are soaring and will continue to do so, as are food and energy costs.

So is it a recession? Perhaps a recession that is just very different to the previous one, or the one before that? And really, when you get down to it does it matter in our daily lives whether we call it a recession or not?

In the SA context, the second quarter delivered negative growth, but unlike the US this single quarter of GDP contraction coincided with higher interest rates, rising food and fuel inflation, a stubbornly high unemployment rate running at almost 34%, and increased jitters over local and global markets negatively affecting the property sector. Higher interest rates make businesses less likely to expand and more likely to draw in their horns, while unemployment makes for lower consumption and drives the vicious cycle of GDP contraction.

Recessions often go hand in hand with bear markets, and such sentiment often has greater significance for citizens, as it affects household savings and pensioner withdrawals. While it remains to be seen whether SA is headed for a technical recession, it is a lot easier to argue that we are living through a bear market. Poor market performance coupled with rising costs have a distinct and negative material impact on anyone drawing an income from a living annuity. In real terms the average person is likely to be far worse off now than they were at the start of the year.

As with so much in this world, the real-life effects are most keenly felt by the poor — high food and fuel inflation means genuine pain for those living on limited wages. The suddenness of the inflationary spike means few employers are likely to have factored in the need for increases running to the higher end of the targeted band.

To bring it back to Erwin and his cat ... it is difficult not to imagine the SA version as dead or dying. Debates around semantics and the definitions of economic terms pale into insignificance when seen against the real impact this set of circumstances is having on people’s lives.

That said, South Africans are notoriously hard on their country and themselves, but inflation-wise we have held up far better than developed countries, we do not have the political instability the UK is experiencing, and we are far better off than many other developing nations, including Russia, Iran, Venezuela and Brazil.

There might still be a lot of work to do, but at least we are working on it, and we are in a far better position as a country than we were five years ago.

• Goodall is director at Investment Management Services.