Recession or depression? Experts answer

Jo-Maré Duddy – Debating the technicalities of whether Namibia is in a recession or depression detracts from the real issue at hand – the low growth environment and what steps are going to be taken to address it.

This was the reaction of the senior analyst of Cirrus Capital, Dylan van Wyk, when approached for comment on the state of the Namibian economy at present.

Namib Mills CEO Ian Collard on Friday sparked a debate when he said: “I don’t know what you are in if you have nine consecutive downturns [negative growth], but then some people will tend to call it a depression."

Market Watch spoke to various local economists yesterday to test Collard’s statement.

The definition for a depression is not as clear cut at that of a recession, which requires two consecutive quarters of negative economic growth. Namibia’s gross domestic product (GDP) has been contracting every quarter since the second quarter of 2016.

Some proposed definitions of a depression includes a contraction of more than 10% in real GDP, others cite severe increases in unemployment or a recession lasting longer than two years, Van Wyk says. “So, due to the duration of this downturn, it can technically be seen as a depression,” he says.

“I think it does not really matter what you call it, the facts are that the consumer and most businesses are under a lot of pressure,” commented the research chief at PSG Namibia, Eloise du Plessis.

Simonis Storm (SS) analyst Indileni Nanghonga believes Namibia is “literally in a ‘deep depression’ with nine quarters of negative growth and increasingly high unemployment”. “This is the longest economic pain ever!” she says.

The co-founder of Cirrus Capital, Rowland Brown, says Namibia is “basically flirting with depression now”.

IJG Securities, agreeing that a depression is not technically well defined and admitting that domestic economic conditions “remain challenging”, says “it might be too early to classify it as a depression”.

Growth pillars

Van Wyk says economic growth stems from four main sectors – consumer spending, net exports, government spending and investment.

“Consumer spending has been under pressure and inflationary pressure is starting to return with fuel prices starting to rise,” he says.

Nanghonga states that “increasing inflation amidst an economic depression is, in our view, a coercion from both sides for consumers, motor dealerships and other sectors that are highly dependent on fuel”.

The renewed weakness in the local currency, continued weak demand, more job losses, as well as rising fuel prices and municipality tariffs have reduced expectations for consumer spending, Du Plessis adds.

IJG points out that corporates have not been taking up credit in order to expand their operations – a catalyst for growth – because consumer demand has been slow. This is evident from the seven consecutive quarters of negative growth in the wholesale and retail sector.

Government spending

Government cannot afford to spend as it has done in the past while debt is increasing at an unsustainable pace, Van Wyk says.

Du Plessis puts it into perspective: “Namibia has run successive budget deficits since the global financial crisis in 2009 to stimulate the economy, which has seen public debt swell to over 40% of GDP from less than 20% of GDP before 2011. The government has adopted a fiscal consolidation path but has missed targets and has had to take a milder approach due to the economic downswing.

“All this to say that there was some room in 2009 to help the economy through the global financial crisis, but the ‘help’ did not end when the economy pulled through. So the debt and spending remained high. Now that the economy is struggling again, the government cannot help because it is too stretched.”

Investment

Van Wyk says gross fixed capital formation has been declining in real terms for two years: 24.4% in 2017 and 28.6% in 2016.

“This is extremely worrying, as it seems the private sector has been retreating and not investing capital into the economy,” he says.

“It can be argued that this is because of a policy environment which has not been investor friendly. Taking into account the recent comments made at the land conference, bringing into question the sanctity of the constitution and property rights in general, as well as the recently proposed increases in corporate taxes, it comes as no surprise that the private sector is taking their money elsewhere,” Van Wyk says.

IJG warns that private sector investments will likely be further deterred if the ministry of finance has its way in implementing the proposed amendments to the income tax bill that will have a greater bearing on business than individuals.

Nanghonga says policy uncertainties regarding tax, land redistribution, the Investment Promotion Act and the New Equitable Economic Empowerment Framework (NEEEF) should be removed “to try and win back investors and investor confidence”.

“We should allow for a strong and bigger private sector that would drive the economy in times when government cannot. Thus, we should be careful not to stifle and scare away investors with an uncompetitive tax regime and policies,” she says.

He sees “no quick end to the current ‘depression’ without proactive and supportive policy”, Van Wyk says.

Brown concludes: “All in all, we are in dire straits and things are unlikely to get better until we see structural change in the public sector and, most importantly, the policy aspect of the investment environment.”