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Austerity measures could worsen recession

Austerity measures could worsen recession

By Mally Likukela

Twilight Capital Consulting Managing Director

According to the latest GDP figures by the NSA, Namibia sunk deeper into recession during the 1st quarter of 2017. Quarterly GDP contracted by 2.7 percent in the 1st quarter of 2017 from a contraction of 1.4 % during the previous quarter (Q4:2016).

The dismal performance was largely on account of austerity measures which saw a number of capital project put on hold and eventually sending the construction sector to its knees taking along the entire economy. The biggest question on everyone’s mind is the duration of this recession. It’s no longer so much about the impact of the recession, but how long before the economy recover.

Given the prevailing fiscal consolidation, all eyes are focused on the private consumption to rescue the economy. In our view, there’s no chance consumers will soon be able to rescue the economy. The only hope for a speedy recovery is for the Government to increase spending in the right ways.

Employment versus deficit

It is our considered view that we believe Government could have made a terrible mistake switching its attention from jobs and growth to deficit reduction and as the result the country is now suffering the consequences. GDP growth contracted further from 1.2 % in the 4th quarter of 2016 to 2.7 % during the 1st quarter of 2017.

Consumer spending as measured by wholesale and retail further contracted from 3.2 % to -7.4 % while the pace of business investment has weakened significantly along with deteriorating construction sector. Manufacturing contracted by 10.7 %. Amid the assault on government spending, unemployment rate rose to 34 % and jobs in the Construction sector suffered the massive casualties. Given the continued further tightening, we expect the picture to remain the same or even worsen.

Private sector remain uncertain

The private sector which usually comes to the rescue in times like this remain apprehensive as well. There is no sign the private sector is about to rescue the sinking economy. In fact, companies are sitting on millions in profits, but they won’t use this money to create jobs because they don’t see increasing demand for their products and services. With the economy slowing and the Government focused on deficit reduction, it’s unlikely that these big corporations – not to mention still struggling SMEs will invest more and increase spending locally.

Recommendation

With no chance that consumers will rescue the economy, the only hope for a speedy recovery is for the Government to increase spending in a way that averts layoffs, creates jobs and puts money in the pockets of ordinary people. While we understand that everyone else need to tighten their belts, we also believe that its time Government loosen its belt a bit.

The current recession could be longer and deeper on account of austerity measures that depresses demand. Unless Government stimulate demand, there won’t be any demand for private sector products and services. The private sector is not going to hire enough workers to make a dent on unemployment? Workers will be laid off and many are worried about their jobs, and households are strapped for cash as they continue to swim in massive debts. Pursuing fiscal consolidation while the economy is weak hurts the economy more. Instead of helping it makes the deficit worse. As unemployment rises and corporate profits shrinks, so is tax revenues. What is needed right now is for government to start spend more but wisely.

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