An unexpected, shocking crisis hit the world in 2020. Covid brought the world’s economies to their knees. In March 2020, South Africa was hit with a hard lockdown due to Covid. The markets went into a downward spiral as soon as the President announced the lockdown. If you were a bargain hunter, you could have picked up stocks next to nothing. These frightening and unpredictable times became an investor’s paradise. Within two years, business is almost normal, and people who invested when the stocks fell are now millionaires!
With economies slowly returning to normal, businesses are still struggling with inflation, high petrol prices, Eskom power cuts, and a host of other instabilities like high unemployment, natural disaster, threats of looting, and other criminal acts like corruption which make it difficult to return to normal right now.
Recession: Yes or No
So are we in a recession right now? Not yet. Although the outlook is better, there is an increased risk of recession if the Stage 6 load shedding continues. Credit rating agencies can reduce SA’s ratings due to persistent load shedding. This is a terrible blow to the economy and will drift into a recession.
A recession is officially when economic activity declines over a few months. Inflation, unemployment and other economic factors drive a recession.
For example, if the fuel supply stops due to the Ukraine/Russian war, we can enter a recession. Another example of a sudden event that can create recession is the Corona Virus outbreak which forced everyone indoors. This, in turn, caused severe financial hardship, reduced buying power and fuelled unemployment.
Another example of what drives a country into recession is when many businesses fail to repay their debts. If many companies default on payments and file for bankruptcy, the country will end up in a recession. It’s a knockoff effect. Suppose the motor industry collapses. With them, they will be parts suppliers, servicing centres, spare parts, accessories and a host of other companies that depend on the motor industry to purchase their products. Thus 1000’s of people will become unemployed. This will undoubtedly drive the country into recession.
Lots of people become excited when the economy is thriving. They buy risky stocks and invest in property. This contagious enthusiasm fuels a frenzied craze of real estate transactions and investments. Just as suddenly as the excitement rises, the bubble can burst, making people sell their stock in panic, creating a recession. All it takes is for one celebrity to make a reckless statement in the media about property or investments, and this will spark panic and mass selling of stocks or property. Inevitably, the economy will collapse, causing a recession.
Inflation
Inflation is average because prices rise annually due to fuel price increases which fuel the cost of transporting goods. When inflation gets out of control, the reserve bank may decide to raise interest rates to reduce economic activity. All banks have to follow the reserve bank’s lead, and when they grow their interest rates, people and businesses find it challenging to meet repayments of loans, cars, and homes. Goods are repossessed as people default on payments. This leads to recession.
Recession can also result from deflation. When prices fall over sometimes, wages follow suit as employers cannot cope with the fall in prices. They cannot make good profits and, in turn, reduce salaries. Pressure from unions to keep wages high may even result in a reduction or closing down of a business because it is no longer viable to operate. If a company is running into losses, then it’s inevitable that it will be forced to shut down. This causes a country to spiral into recession.
Jobs
A significant contributor to recession is the new and unique technological advances. When the Industrial revolution took place, machines replaced people. Jobs operated by people became obsolete, and unemployment increased, creating a worldwide recession. As we get closer to advanced technology, from robots to self-driving cars, people will be out of jobs once again. We have robots that answer questions and masquerade as humans when we make calls. We have Bots that chat with you when you are communicating with businesses online, and it is hard to tell the difference between a bot and a human. Companies become less dependent on human staff, and thus unemployment is rife.
Layoffs are common. Businesses close down. Many investors have left the country. Owners cannot pay employees, and high demands increase, when businesses struggle, leading to companies folding. Recently in SA, almost 50% of the population was unemployed.
To avoid such a tragic situation, try to cut back on your spending. Try to save the money that you are squandering unnecessarily. Don’t buy new furniture, cars or homes. Check that you can survive for at least six months if you lose your job. Refresh your CV and improve your network of professional and personal contacts. This will make it easier to find another job quickly should you find yourself retrenched. Add a new skill. Do a short course. Keep up to date with developments within your job space.
Self-employed people should diversify their production. By diversifying, you are creating more room for your products should the consumer not want your mainline production item. It would be best if you improve your cash reserves. Make sure you have more liquid assets which can be easily accessed and controlled by you during a downturn in the economy. Do not allow your money to be tied down in hard assets to dispose of.
South Africa edging closer to recession in 2024
Defying the shadow of recession, South Africa charted a narrow growth trajectory in the economy’s first quarter of 2023, as per the Tuesday’s release from the national statistics agency.
Despite the recent downturn, the country, famed as the industrial powerhouse of Africa, witnessed its GDP inch up by 0.4% in the opening quarter, contrasting with a 1.1% dip during 2022’s closing months (based on revised data), articulated a statement from StatsSA.
Unveiling the dynamics of this growth, it highlighted the manufacturing and finance sectors as the crucial engines of this marginal rise on the supply side. On the other end, the export landscape emerged as the primary propellant of demand.
Even though the nation grapples with severe power outages, the growth surpassed the anticipations of industry analysts. The energy debacle in South Africa has further escalated since the previous year, imposing scheduled power disruptions lasting a gruelling twelve hours per day. A staggering 207 days of power shortfalls were anticipated for 2022, dwarfing the 75-day record set in 2021. As inferred by the Energy Minister, these interruptions culminate in a production loss exceeding a daily R900,000,000.
Regardless, a commendable growth in activities was observed in eight of the ten key industrial sectors during the first quarter. A decline was only registered in the domains of agriculture, electricity, gas, and water, StatsSA informed.
After a lacklustre end to 2022, the mining industry has managed to pivot and make a positive stride.
South Africa likely already in a technical recession
South Africa GDP Growth Rate – Historical Data
| Year | GDP Growth (%) | Annual Change (%) |
|---|---|---|
| 2021 | 4.91 | 11.26 |
| 2020 | -6.34 | -6.65 |
| 2019 | 0.30 | -1.22 |
| 2018 | 1.52 | 0.36 |
| 2017 | 1.16 | 0.49 |
| 2016 | 0.66 | -0.66 |
| 2015 | 1.32 | -0.09 |
| 2014 | 1.41 | -1.07 |
| 2013 | 2.49 | 0.09 |
| 2012 | 2.40 | -0.77 |
| 2011 | 3.17 | 0.13 |
| 2010 | 3.04 | 4.58 |
What happens during a recession?
The initial response typically seen during an economic slump is a reduction in consumer expenditure. The unpredictability inherent in recessions often prompts individuals to shift their focus towards saving.
Regrettably, while this is a common instinctual reaction, most individuals are unaware of its contribution towards the continuation of an adverse cycle. Reduced overall spending leads to lower consumption levels, further destabilising the economy, thus perpetuating the cycle. In recession periods, banking institutions frequently reduce their interest rates to promote lending and investing as a bid to rejuvenate the economy. Governmental spending and taxations also undergo modifications as authorities endeavour to stimulate economic growth through strategic policy adjustments. Nonetheless, this approach, while advantageous in the short term, may impose detrimental impacts on the economy over an extended period by raising interest rates.
How to survive a recession
Adopting a savvy strategy is crucial when facing a recession, yet excessive frugality, such as incessant saving, refraining from occasional meals out, or delaying essential clothing purchases, only exacerbates the predicament. Of course, it’s vital to implement what should always be in your financial playbook – drafting and faithfully adhering to a budget to prevent overspending. However, a handful of additional steps can also bolster your resilience during these challenging times.
Don’t become a cosigner
Although offering to be a cosigner on a loan may seem like a selfless act or an advantageous move, think twice, especially during periods of uncertainty. The unpalatable truth is that should the borrower fail to meet their obligations, you’re the one held accountable. For loans under your name, you might be burdened with a higher interest rate compared to obtaining it independently.
Don’t take on more debt
In the throes of a recession, one must refrain from accruing further debt. The solitary exception to this rule could be a home loan, geared towards securing a tangible asset. As far as possible, expedite your debt repayments. Practice the art of patience, focusing on purchasing only the essentials. As for your desires, defer them until you possess the necessary finances.
Aim for a Debt-Free Life
In the grip of a recession, piling on more debt is a serious misstep, the only exception being a mortgage used to secure a property. Strive to eliminate your debt at the earliest. Adopt a culture of patience and prioritise your needs over wants. Postpone splurging on luxuries until you’ve saved up enough.
Read here how to consolidate your loans into one.
Steer Clear of Adjustable Rate Mortgages
On the face of it, linking your mortgage interest rate to the lowered recession rates through an adjustable rate mortgage might seem savvy. But remember, when broad interest rates begin to climb, so does your mortgage. As we like to emphasise:
Severe hikes in interest rates can render mortgage repayments untenable, leaving financial institutions no choice but to seize the properties in question.
To keep your footing during uncertain times, lock in your safety with a fixed interest rate.
About Arcadia Finance
Arcadia Finance streamlines the process of acquiring a loan, enabling you to submit a no-cost application and receive proposals from as many as ten lenders. Our lending affiliates are all vetted for reliability and compliance with the regulations enforced by the National Credit Regulator of South Africa.
Final Words
Recessions last almost a year. Sometimes it can last for nearly two years. The real estate market collapse caused the great recession between December 2007 and June 2009.
The Dot Com Recession was between March 2001 and November 2001. Scandals and the infamous 9/11 attack crushed the US. The country went into recession, and this infected other countries too. Fortunately, the economy recovered quickly, and months later was back to normal. This affected South Africans as well because the Global market is tight-knit, and an event in one country also impacts partner countries. As our Rand is inextricably linked to the Dollar, any major event in the USA will also affect the value of our Rand.
When the next recession hits us, it is unpredictable as it depends on many factors within and outside our country’s borders. We should always be prepared and have enough liquid cash to survive for a few months.
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