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What the recession means for the future of South Africa

South Africa has entered a technical recession, meaning the country experienced two successive quarters of negative growth.

That’s bad news for a number of reasons. The economy is performing sluggishly when accelerated growth is needed to meet the country’s development goals. In addition, news of a recession following the recent rating downgrade further undermines investor confidence at a time when increased investment is urgently needed.

Let’s consider these dynamics in a little more detail before considering what individual investors can do to weather the storm.

Seeking stability in growth

In his 2017 budget speech, former finance minister Pravin Gordhan announced that our country stands “once again at a crossroads”. Slow growth and high unemployment remain persistent challenges, particularly in the face of a challenging global environment.

Beyond dry economic data, Gordhan also reminded us of the social and political earthquakes abroad (Brexit, Donald Trump, the Eurozone crisis and so on) and at home (such as student protests shutting down campuses across the country). Rather than wait for crises, Gordhan seemed to suggest the need to address the underlying sources of dissent and distrust.

The key to a more inclusive economy is not simply a question of distribution but also of strong, consistent growth. In Gordhan’s pithy phrasing: “Our growth challenge is intertwined with our transformation imperative. We need to transform in order to grow, we need to grow in order to transform. Without transformation, growth will reinforce inequality; without growth, transformation will be distorted by patronage.”

Four months later, those encouraging words feel like a distant memory. Restoring vitality in the economy will require strong, active leadership. Treasury’s lacklustre response fails to outline concrete action to remedy the slowdown. However, Finance Minister Malusi Gigaba has undertaken to meet with business leaders to consult on a way forward.

One step back, two steps back

The recession signals a slowdown of investment in the South African economy. Following recent rating downgrades, the announcement of a recession is both evidence of diminished investor confidence and will itself further undermine confidence in the economy, a self-reinforcing cycle.

The good news is that South Africa’s economic fundamentals still appear relatively healthy, and as the Treasury statement emphasised, factors such as a recovery in commodity prices and improved global economic conditions could help to turn things around. The main source of investor wariness remains political uncertainty.

In other words, investors are looking for places to put their money and South Africa retains the potential to be an attractive investment destination.

The bad news is that our political problems show no sign of immediate resolution. On the plus side, the country’s institutions remain stable and largely independent (although Public Protector Busisiwe Mkhwebane’s recommendation that the constitution be amended to constrain the Reserve Bank’s independence will not have helped). However, the many detailed reports about ‘state capture’ have not so far resulted in much concrete remedial action.

The situation is far from hopeless, but it is serious. If the country could previously have been said to have been at a crossroads, a more apt metaphor may now be a tipping point. More than ever, all South Africans need to unite to demand accountability, transparency and the rule of law.

Weathering the storm

  1. Stay the course

We can get a better sense of how diminishing investor confidence affects the economy by considering how the economic and political climate affects our personal finance decisions. In a bull market, most of us are happy sit back and watch our share portfolios make steady, incremental gains.

During a downturn, we become more hesitant about investing our money. Can we rely on positive performance on the JSE?  Is property still a safe investment? How will an unstable rand affect the value of our portfolios? Maybe we should keep our cash under our mattresses until things improve.

During a recession, ordinary investors will understandably consider switching to lower risk investments. That is not always prudent. If history is any guide, it teaches us that investing works best as a long term strategy. Ordinary investors simply cannot reliably time the market. Leaving investments to grow over the long term has proven more effective over time than attempting to beat the market. Taking your money out of the stock market at every suggestion of trouble could ultimately lead to smaller gains. (A good way to trim the waste is by ensuring you don’t pay excessive investment fees.)

  1. Strong and stable

On the other hand, it may not be prudent in periods of low growth to place your cash in high risk investment vehicles. However, that is no reason to settle for sub-optimal returns. Indeed, in difficult times it is particularly important to preserve and grow your savings.

Don’t leave cash in low-yielding accounts. Secure a savings account that offers strong performance even in difficult conditions.

  1. Consider the currency

South Africa’s weak economic prospects can be expected to have a negative effect on the rand. That’s bad news for the value of your local investments. Even if your portfolio performs well, a weak rand will affect the value of your investment in hard currency terms. That’s why offshore investments have become an increasingly popular option.

Secure a better rate today. Use the My Treasury Optimiser to find the best returns on your cash investments. Because there’s a wiser way to save.