Momentum urges South Africans to prepare for possible recession

Momentum has said South Africa remains at risk of a recession and households should prepare for an economic downturn as the country’s economy continues to perform poorly despite post-election optimism and no load-shedding for over 150 days. 

South Africa’s economy appears to have avoided tipping into a recession in the second quarter of 2024, as its manufacturing and retail sectors show growth of a low base. 

These sectors were particularly weak during the first quarter of 2024, when the country’s economy shrank by 0.1%.

A major improvement in electricity supply in recent months will also aid growth, with economists polled by Bloomberg predicting a 0.5% gain in the second quarter. 

While South Africa is not currently in a recession, Executive Financial Adviser JJ van Wyk from Momentum Financial Planning said the possibility remains a topic of discussion, particularly in light of recent economic challenges.

Although South Africa appears to have avoided slipping into a recession in the second quarter of 2024, the economic landscape remains uncertain. 

“We face challenges like declining GDP per capita and elevated interest rates, which ultimately strain household finances. In this environment, our households should up their financial game,” said Van Wyk.

A recession typically involves negative gross domestic product (GDP) growth, rising unemployment, falling retail sales, and decreased income and manufacturing output over an extended period.

Contrary to what many households fear, Van Wyk said recessions are a natural part of the business cycle and include economic expansion and contraction phases.

The latest Momentum Unisa Household Financial Wellness Index further reveals that many South African households overestimate their financial knowledge, putting them at risk of making poor financial decisions. 

With 90.6% of households unable to perform basic financial calculations, the need for increased financial literacy is evident.

“If you don’t understand what it is, how can you plan a way forward?” Van Wyk said. “With the right knowledge and advice, it is possible to stand firm in the face of recession and safeguard your household’s financial well-being.”

During a recession, households experience immense pressure, as South Africa’s GDP is largely a product of consumer spending. 

“One of the first noticeable effects is reduced consumer spending, as people become more cautious with their money in the face of economic uncertainty.” 

“This decline in spending can further weaken the economy, creating a cycle of reduced consumption and economic contraction.” 

In addition, elevated interest rates make borrowing more expensive, leading to higher costs for servicing debt. 

Interest rates are expected to be cut in the coming months, but many economists anticipate the cutting cycle to be short and shallow, providing limited relief to households. 

How to prepare

Given the potential impacts of a recession, Van Wyk said it is important for households to take proactive steps to prepare financially. 

He outlined several steps households can take to minimise the impact of a recession on their finances. These are outlined below. 

• Build an emergency fund: Establishing a financial safety net is crucial. Aim to save at least three to six months’ worth of living expenses in an easily accessible account.
• Reduce debt: Paying down high-interest debt can free up resources and reduce financial stress during tough economic times.
• Stick to a budget: Creating and adhering to a budget helps ensure that your spending aligns with your financial priorities, reducing the risk of overspending.
• Increase financial literacy: The Momentum Unisa report underscores the importance of financial literacy. Despite 45.7% of households believing they are financially literate, only 15% actually are. Improving your understanding of basic financial concepts—such as interest rates, inflation, and investment risks—can empower you to make informed decisions.
• Diversify income sources: If possible, explore additional income streams, such as side businesses or freelance work, to supplement your primary income.
• Invest wisely: During uncertain times, it’s essential to evaluate your investment portfolio carefully. Avoid making emotional decisions and seek advice from financial advisers to ensure your investments align with your long-term goals.

These are general tips that should be followed even during periods of strong economic performance. 

An emergency fund is of particular importance as having a fully-funded account can prevent individuals from having to cash out their investments and breaking the compounding process to pay for immediate expenses.