The diversity in recession experiences
Aug 31 2009
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The standard definition of a recession is that it entails at least two consecutive quarters of negative economic growth or declining GDP at the aggregate level. However, such a general assessment may hide important differences in the way different sectors of the economy are experiencing the downturn in economic conditions. The table below summarises the diversity in the experiences of the different sectors as distinguished in the official statistics.

The table leads one to the following conclusions:

• Wholesale and retail trade, hotels and restaurants have been in recession for the longest period, viz. five quarters. This is not surprising in view of this sector’s sensitivity to movements in interest rates, which caused it to respond with a short lag to the tightening in monetary policy that started in June 2006. Having been the sector that benefited most from the debt-financed consumer boom that commenced in 2004, it was also the sector that bore the brunt of the inevitable slowdown when the household debt burden reached its affordability ceiling.
• The manufacturing sector has been in recession the second longest, with its woes being compounded by the sharp contraction in global demand on top of already weak domestic demand. It is also the sector that has suffered the worst decline in value added of all the sectors.
• As one would expect, general government and personal services did not contract, but the fact that the construction sector achieved the same feat just shows how beneficial the government’s infrastructure drive and the 2010 World Cup preparations have been to it.
• However, the last column of the table gives an additional perspective in also looking at conditions prior to the official onset of the recession. Apart from illustrating the problems faced by the manufacturing sector even more harshly, it highlights the sustained contraction in mining production in recent years, while also reflecting Eskom’s struggle to maintain power generation. Perhaps more importantly, it raises the question of whether the real issue is not structural weakness rather than cyclical weakness in some sectors.

The analysis at the sector level can also assist one in judging the possible response of the different sectors to the policy measures that have been implemented and how quickly and robustly they will be able to shed the shackles of the recession.

Firstly, for its fortunes to improve, the mining sector depends on the recent signs of stabilisation in the world economy turning into a sustained recovery. This also applies to the manufacturing sector, but this sector additionally needs to see a recovery in domestic demand, of which there are tentative signs, e.g. car sales bottoming out.

Secondly, the lack of a noticeable response from the retail sector to the decline in interest rates (500 basis points to date) indicates just how constrained household finances have become as a result of the high debt burden, which households are apparently finding difficult to reduce. Increasing unemployment is adding to the negative trend. And here there is also a possible structural shift at play – perhaps we are witnessing a fundamental change in consumer behaviour, with conservatism replacing the profligacy of the boom years.

Thirdly, the construction sector needs to ask itself how it is going to adapt to the inevitable fall-off in public sector activity in future years. Stronger construction activity in the private sector could in time replace public sector spending, but surely one cannot rely on a smooth transition.

One only needs to look around one to witness the cleansing effect of this recession. The excesses of overexpansion are being punished, but the strong will not only survive but come out of the recession better placed to exploit new growth opportunities.

Adapted from source: Economic Commentary, Jac Laubscher - Sanlam Group Economist, 25 August 2009