HILARY JOFFE: Cinderellas shine but stalwarts turn ugly

There’s nothing technical about a recession, says Statistics SA’s head of economic statistics, Joe de Beer: "You’re either in it or you’re not."

SA, clearly, is now in it.

And while the convention among economists is to define a recession as two consecutive negative quarters — a criterion SA has now, sadly, met — on some definitions we’ve been in recession for a while. The 0.3% rate in 2016 hardly constituted growth. And on a per capita basis the economic growth rate has been negative since 2015, with growth lagging population growth.

SA has been going backwards in real terms, with frightening consequences in terms of unemployment and shrinking incomes.

Now, however, it’s in recession on any definition, to the consternation of economists, most of whom had expected that the economy would turn around from the negative 0.3% in the fourth quarter of 2016 to show a positive 0.8% to 1% or so in the first quarter of this year – not a negative 0.7%.

So how and why did so many economists get it wrong? And how likely is it that the number will be negative for the full year?

One thing to watch is that these numbers are annualised, so they reflect what would happen if the trend recorded over a single quarter were to prevail for the year as a whole. That means getting it a little bit wrong can have a big effect.

For example, the agricultural sector bounced back as everyone had expected, growing an annualised 22% and along with mining providing what momentum there was in the economy in the first quarter. But 22% means that the sector actually grew 5.5% between quarters. Multiply that by four and you get the annualised rate; get the quarterly figure wrong by a percentage point or two and you are way out on the annualised rate. It’s a long-established method in SA and many other countries, but risky for forecasters.

Everyone had expected that the bounce in 2017 would come mainly from the two "primary" sectors: agriculture, which is indeed racing ahead after eight negative quarters now that the drought has ended, and mining, which grew an annualised 13% in the first quarter.

What few seem to have expected, however, was the tale of two economies that emerges from the figures. The real shock was the crack in the tertiary services sector, which has been the mainstay of what little growth SA has recorded in recent years.

The bounce in agriculture and mining led to the economy’s primary industries growing 14.9%, but absolutely everything else was in the red for the quarter. Secondary industry, which is mainly manufacturing (and electricity), was down 2%. The tertiary sector contracted 3.4%, making this the first negative since 2009.

Disturbingly, that contraction included the financial services sector, which had previously kept expanding even when everything else was shrinking, but this time was a negative 1.2%. Even the government contracted — perhaps a welcome sign of fiscal consolidation, but no help to GDP or employment.

The services sectors have been big job creators in the past so no wonder the latest unemployment figures were so bad. An unemployment rate of nearly 28% should be deemed a recession in itself.

Statistics SA now compiles GDP from both sides of the economy — supply and demand, as it were. On the demand, or expenditure, side of the economy, some of the trends are equally unexpected and disturbing.

One plus is that investment spending was positive for the first time in about six quarters. On the minus side, however, consumer spending contracted quite sharply, and exports decreased after finally starting to show some life in the last quarter of 2016.

The question now is whether the 1% growth rate that the Reserve Bank, ratings agencies Fitch and S&P Global Ratings and the IMF are projecting for this year is attainable. Economists at Rand Merchant Bank, who were among the few who got it right for the first quarter, see growth of just 0.5%, with the World Bank now at 0.6%.

The annual Statistics SA figure, which compares 2017’s first quarter to 2016’s (bad) first quarter shows a positive 1%, so that’s a possibility, and it would not take too much of an uptick in the next couple of quarters, off the low base of the latest two, to get there.

However, it’s possible we ain’t seen nothing yet. We don’t yet know how hard investor confidence was hit by the cabinet reshuffle at the end of the first quarter and the rating downgrades that followed. The big "R" could erode confidence further. Investment could turn negative again. Consumers are likely to remain under pressure, too, and the first quarter suggests SA may not get as much help from exports in 2017 as many expected.

The last recession in 2008-09 took three quarters and growth was negative for 2009. That was prompted by global events; this time SA’s woes are largely of its own making. In an environment of contestation, corruption and capture, no one in power is paying much attention to how to grow the economy. We can but hope for just 1%

• Joffe is editor at large.