It's official: We are in a recession

Statistics SA released the quarterly Gross Domestic Product figures today. GDP has dropped by 6.4 percent! GDP is 'a basic measure of an economy's economic performance, [it] is the market value of all final goods and services produced within the borders of a nation in a year'. As such it is an indicator of how the economy is doing and is a very important indication of what the government might do to manage the economy next. This drop means we are in a recession. So what do these figures mean?

• Jobs are less secure
• Home loans less available
• Budget planning is imperative!

There has been some speculation that we are heading into a recession and these figures confirm that we have. Recession is defined as two consecutive quarters of contraction rather than growth. In a growth model based economy, contraction, recession and depression are the voodoo words of economic collapse. A growth based rather than sustainable economy will always be worried by lack of growth as many loans are based on the fact that the economy is expected to continue to grow. So in a growth based economy, and the government has signalled that it wants to follow a developmental model, we can expect the government to react to these figures by trying to boost the economy.

One of the methods that the Government has mandated is the Reserve Bank policy of inflation targeting. This is basically an interest rate strategy and we can expect the MPC (Monetary Policy Committee) to cut rates on Thursday 28th May 2009. The announcement will be broadcast live on SABC 3 from 15:00 to 15:30. The fact is we are in a recession and planning your budget has never been more important. Sound personal finance planning now will see you through the lean times ahead until the cycle turns and a new boom market is created. Of course in a growth model economy we will always have a cycle of boom and bust. So with no real change expected there, protect yourself now to survive the economic waves later.

What's in store for the future?

The South African Reserve Bank has released its Monetary Policy Review on the 14th of May 2009. The last review came out in November 2008. GDP contracted at an annualised rate of 1.8% in the final quarter of 2008. This is a result of a number of factors including the global financial problems and inflation. We are still in for a tough time ahead and the markets are not expected to come right too quickly. So what can you do while the turbulence washes over us?

• Batten down the hatches!
• Plan your budget
• Get a savings account

There is now a real possibility that we will enter into recession for the first time in 17 years and the contracting growth we are seeing is expected to last for most of the rest of the year with a turnaround envisaged towards the beginning of 2010 only. Inflation is slowing, partly as a result of the inflation targeting steps taken by the Monetary Policy Committee in cutting interest rates and partly due to the slowing economy damping spending and inflation at the same time. We are not expected to hit the targeted range of 3-6 percent inflation this year although we should come in close to the top end of the target. There are still problems that may occur including a massive hike in Eskom tariffs to fund infrastructure spending.

The report estimates that inflation will hit 6.2 percent by the end of 2009 although this is an estimate with, as with all economics, a heavy dose of Ceteris Paribus, or if nothing else comes along to upset the apple cart. This is a serious flaw in economic thought as projections and estimates always lag behind the reality and reality is in a constant state of flux and it is not really possible to separate factors and treat them as independent when in fact they are highly interlinked and influence each other. So we can expect some light on the horizon but now is the time to expect change and prepare yourself for any shocks that could still occur, plan a budget and stick to it and start putting money aside for just in case.