What is a recession?
A country enters into a technical recession when there is a decline in gross domestic product (GDP) for two consecutive quarters. GDP is the total value of all the finished goods and services produced within a country over a specified period of time. It is a measurement of economic activity and indicates how “healthy” a country’s economy is. Therefore, in an expanding economy GDP rises, and in a contracting economy GDP declines. As indicated in the graph below, the South African economy shrunk by 2.6% in the quarter ending March 2018, and again reduced by 0.7% in the following quarter ending June 2018. It is based on these economic indicators that saw South Africa slide into a recession.
Why is GDP important?
When more goods and services are produced within a country, firms are able to hire more workers and are also able to increase wages as the economy grows. This increase in wages allows consumers to spend more money, which escalates the demand for goods and services. Companies can spend money on expansion, employment increases and therefore both consumer and business confidence rises. Within this type of environment, GDP will rise as the economy grows.
Alternatively, when the GDP contracts and the economy goes into a recession, wages decrease, retrenchments increase and firms minimise their investment and spending. This is also not positive for SA’s outlook as further credit rating downgrades could be imminent. It is therefore important for consumers, business and government to ensure that GDP increases as it creates stability and prosperity for all.
How does a recession impact consumers?
Generally speaking, the effects of a recession can be devastating on consumers. The overall impact however would depend on how long the recession lasts. Within a recessionary period, the currency tends to decrease against major currencies as the demand for the local currency wanes. The fall in currency means that all imported goods such as oil becomes more expensive, and as such the fuel price increases. Not only does this affect consumers negatively, but associated increases in food and basic daily items adds more financial pressure on consumers.
As prices increase and wages decrease, many consumers find themselves in a debt trap as they turn to credit to survive. Within the recession period, many consumers will simply not have the means to pay back any loans, and will default on their credit payments. This not only places the consumer under more pressure, but also puts significant strain on the banking industry. For those that cannot pay their home-loan anymore, the bank will repossess the home in order to try to recover the outstanding balance of the loan granted.
What can you do in a recession?
Many countries have been through quite severe recessionary periods, and although it is not easy, there are a number of things you can do to survive a recession.
1. Try and secure your employment or source of income
In most cases, those that have a secure form of income are able to withstand a recession. As retrenchments will become more relevant, you would need to upskill yourself, work longer hours, have a plan in place should you become aware of upcoming retrenchments, try and find alternate ways to earn extra money, or secure another employment opportunity.
2. Have an emergency fund in place
Because the unemployment rate is expected to increase, it is critical that you have emergency funds available. This is an amount of money that is available to you immediately should you either be retrenched, your salary reduced, or you need money for an unexpected emergency. Typically, you would need about three times your monthly salary, however in this time period it would be advised to have at least six times in a short-term savings account. If you don’t have an emergency fund in place, start saving for this as soon as possible.
3. Reduce your expenses and debt
Do this wherever you can, and as fast as possible. Evaluate your situation and cancel all non-essential accounts and expenses. From a debt perspective, do not let this spiral out of control and rather speak to a professional to assist you should you not be able to cope with the monthly instalments. Draft a budget and understand what the minimum that you need on a monthly basis to survive. Any additional expenses and luxury items should be cut out immediately. There are a number of ways to cut back on expenses, like being part of a carpool, growing your own vegetables and using water and electricity sparingly.
4. Continue to save for the future
Although a recession puts strain on consumer spending, it is still essential for the household to try and save as much as possible. There are many investment opportunities during a recession period, and retirement is still inevitable. Once you make it through the recession and markets start picking up, you will be very glad that you continued to save and invest.
5. Take a step back
A recession is not the end of the world, but the fear could cripple your rational thoughts and you could end up making emotional and negative decisions. Sliding into a recession is not anything new, and South Africa has been in recession eight times since 1961, the longest being between 1991 and 1992.
As in the past, South Africa will get through this, so take a step back and reflect on your personal situation. Don’t allow yourself to get caught up in the negative sentiment, but rather remain focused and positive. Communicate with your family about your financial situation and stay in control.
Barrie van Zyl, senior manager at Alexander Forbes.