Prpoerty Talk

The bombshell news bulletin this past week was the release of the GDP growth rate for the first quarter of 2017 by StatsSA showing that the South African economy moved into recession, yes the dreaded R-word, with a reported 0,7% contraction in real quarter-on-quarter GDP growth rate.

This follows a 0,3% contraction in the 4th quarter of 2016. The widely accepted measure of a recession is two or more consecutive quarters of negative growth in real GDP quarter-on-quarter growth rates. South Africa has experienced 8 recessions since 1961.

The longest of these was in 1991/92 - I remember it clearly as I had just graduated from UCT with a B.BusSc. in Mathematical Economics and nobody was hiring. Having left South African shores to seek fame and fortune in Europe and the US, I ended up working in Sydney, Australia as a builder's labourer.

That is like being an assistant to seriously manual labour - well below the skill level of a brick-layer or carpenter. I specialized in the demolition of office spaces as it was far easier breaking things down than building them up.

I remember thinking at the time that I must have been the most over-qualified builder's labourer in Australia. It was hard work but surprisingly well paid - seems like no natural Australian's were desperate enough, or stupid enough, to want to do that type of work.

For the 16 years following 1992 we enjoyed a period of solid economic growth. This came to an abrupt end in 2008 with the global financial crisis. Although the contraction was very severe it was relatively short lived.

The 2011 mini recovery has however been followed by a consistent downward trend largely of our own domestic making and now culminating in a recession. It is interesting that our first quarter property sales figures were significantly up on the prior year despite this macroeconomic malaise. That gives us some reassurance that you can still do excellent business in a market that is tougher than usual.

The fact that our economy is technically in recession does not help our standing with the international ratings agencies of Moody's, Standard & Poor and Fitch. At the end of last week, Moody's downgraded SA debt to one notch above sub-investment grade or junk status.

This is relevant and something we should take note of as it has the potential to impact on our cost of capital for the country as a whole and in turn on the cost of your mortgage debt. Moody's has also placed SA on a negative outlook, which means that a further downgrade is possible if the political standing does more damage to our economic growth and financial strength.

The immediate impact on SA if Moody's and S&P were to relegate our sovereign debt to junk status is that our local currency bonds indexed to Citi's World Government Bond Index would be sold off as this bond fund has criteria of only investing in investment grade government bonds.

The sell off or capital flight is estimated to be between R86bn and R130bn. That is substantial and would depreciate our Rand exchange rate and push us further into recession. The impact of politics on our economics has never been so patently clear.

The lyrics of Bob Dylan's song, "steal a little and they put you in jail, steal a lot and they make you king" echoes in the hallways.