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Will South Africa recession affect business, trade partners?

SOUTH Africa (SA) officially entered in what in economics acknowledged as a technical recession.

Subsequently declaration made on Tuesday 04th September 2018 after it was revealed that the country’s real gross domestic product had decreased by 0.7 per cent in 2018’s second quarter.

There is no uncertainty planned 1.5 per cent growth in SA for 2018 is likely not to be attained as planned earlier on.

This slump regrettably is upto- the-minute during not only within South Africa’s land expropriation laws and unfolding socio-economic transformation.

But within a time when universally financial market are stressed and escalating trade wars and geo-political tensions continues amongst large partners, predominantly between USA and China.

Cautiously, what would slump mean to businesses as SA growth move in its first recession since 2009, with two quarters of negative growth remains an area of interest for economic analyst. SA’s real GDP numbers indicates that its economy straitened by 0.7per cent in the end of Q2 of 2018, resulting a revised fall of 2.6 per cent chronicled in the Q1 of 2018.

This trend and changes compelled by policy uncertainty signposts that on-going uncertainty will continue to discourage business confidence and investment.

What are the key drivers behind SA 2009 recession that continued to panic Pretoria’s economy leading to a fresh recession status? Could there be a rescue package to avoid markets taking a drastic hit in the Q2, 2018 that could have prevented the country subsiding into economic confusion?

Africa’s most mechanized and industrialised economy is now in recession. South Africa recorded a 0.7 per cent dip in GDP between January and March, which trailed on from a 0.3 per cent shrink in the last quarter of foregoing years.

It is the first time since the global financial crisis in 2009 that South Africa has documented two successive quarters of negative economic growth. Although the country is not alone in Africa, here are some factors that have contributed to South Africa’s economic downturn.

One, the SA’s agriculture sector has experienced a decline of 29 per cent in the Q2 this year. SA economy breakdown illustrates that the decrease was largely due to a drop in the production of farming crop, horticultural products and the effect of drought. Owing these factors, agricultural sector has contributed negative 0.8 per cent to GDP growth.

Two, even though optimistic contributions to GDP in SA came from the mining business as well as the finance, real estate and trade services sectors, transport and trade were the sectors that are believed to be toughest hit.

The SA national statistical service reports shows that the storage and communication industry and transport contracted by 4.9per cent, contributing negative 0.4per cent to the GDP, while trade, catering and accommodation industry further shrunken by 1.9 per cent contributing to negative 0.3 per cent to the GDP.

Three, although net trades contributed positively to growth in spending on GDP, with exports of services up by 13.7per cent, mostly by increased trade in precious metals mineral products and vegetable products, imports only increased by 3.1per cent, led to expenditure on real GDP decreased by 0.9per cent in the second quarter of this year, succeeding a decrease of 2.6 per cent quoted in the previous quarter.

Four, given SA public sector absolute consumption expenditure increased by 0.7per cent, contributing 0.1per cent to GDP, household final consumption expenditure, on the other hand decreased by 1.3per cent, contributing negative 0.8 per cent to total growth in Q2.

Such inclination gross fixed capital formation decreased by 0.5per cent, contributing negative 0.1per cent to GPD. Fifth, listening to an interview of Nhlanhla Musa Nene, SA Finance Minister put out on Wednesday, September 5th 2018, noted that the engineering and manufacturing industry during Q2, 2018 contracted by 0.3 per cent with the majority of the ten manufacturing divisions reporting negative growth rates in the said quarter.

At the wake of the recession news, the local currency lost 1.5 per cent against the dollar. What is the consequence to SA itself and on trade partners where SA companies have businesses such as mining, banking, insurance, hotels etc.?

In the course of an economic recession, businesses especially small businesses are regularly hit. Some businesses will be affected more than others, and normally amenity services will start to feel the agony as both trade and private customers cut back on expenditure.

Budget controls, cost cutting power and insufficient preparedness for a recession can make it unbearable for a small business to live on.

In many cases, such recession will affect businesses deprived of sufficient funds to be unable to continue functioning. Although in other situations, small businesses may show significant flexibility to overcome such situation, this will largely rely on creative ways to survive a downturn.

Under recession situations, many businesses will drive on a securely meticulous cash flow because they don’t typically have large cash resources available to them any longer.

As the money comes in, it goes out to meet growing demand and if a payment from a customer(s) is deferred. Such deferment puts the entire cycle in risk and for those with banks loans situation can be worse.

In a recession, customers may delay purchases or payments for longer than usual, often since they are waiting for income to arrive themselves.

This causes a chain reaction of deferred overheads from one seller to another, which normally slows down all aspects of business along supply chain.

And in cases, reduced availability of credit can make it incredible for businesses especially SMEs to overcome by looking for bank credit.

In economic sequences, businesses that specialise or rely on a few major clienteles for the bulk of their income can lose a substantial amount of returns if one or more of those customers reduces its purchase amount or stops buying completely.

During recession epoch, if a large client goes out of business, it compounds the business’s problem because not only does it lose steady business, but it also may also fail to get money the client owes.

In inventory-intensive industries, should recession transpire at a time when the retailer has a large quantity of stock earmarked for a particular client or market segment, the business owner can lose cash by being incapable to sell the goods to anyone else.

Cost of business and revenue leads to financial shortages in business operations, which generally results in budget cuts wherever possible.

It’s easier to lay off workers than it is to escape from a rental contract, so one of the first steps a business owner takes is reducing staff.

Whether the enterprise lies off its newest employees or those who are redundant because of lost business, the result is fewer workers may be required to do the remaining work on same payment.

This further reduces the opportunities to generate income because remaining staff can become overworked or demoralized. Repeatedly seen as a luxury for companies, advertising is frequently one of the first activities to be cut when a business experiences budgetary tight.

Predominantly in companies with a well-established customer base or a unique product that has little market competition, it’s possible to manage without marketing and advertising for several months at a time. Nonetheless, this might be harmful in the long-term since no new customers are being brought in to counter customer attrition.

The ripple effect of this is that advertising media may raise rates to cover their fixed costs in the absence of enough business, creating it even tougher for the small businesses to resume promotion when the economy recovers.

What could be learnt from South African recession situation is that economic recessions are often portrayed as short-term events. Nevertheless, as an extensive body of economic writings reveals, the consequences of high unemployment, falling incomes, and reduced economic activity can have lasting consequences.

For example, employment loss and falling incomes can force families to adjourn or forgo a college education for their children. Freezing credit markets and disheartened consumer spending can stop the creation of otherwise vibrant businesses

Author: Dr Hilderbrand Shayo

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