Recession fears loom as diamonds squeeze economy to Q1 slump

Mbongeni Mguni - Lewanika Timothy | Monday July 8, 2024 06:00

A recession is economically defined as a sustained period of weak or negative growth in real GDP (output) that is accompanied by a significant rise in the unemployment rate. The most common definition of recession used in the media is a ‘technical recession’ in which there have been two consecutive quarters of negative growth in real GDP.

Should the current economic slowdown deteriorate into a recession, it would be the first since 2020 and a knock to the country’s ambitions of reaching high-income status by 2036.

Figures from Statistics Botswana show that the contraction in the first quarter was mainly due to constrained mining activity and values, particularly those around diamonds and diamond trading.

“The real Gross Domestic Product declined by 5.3 percent during the period under review, contrasting with a 5.3 percent increase in the same quarter of 2023. “This downturn was primarily influenced by a decrease in real value added of the Diamond Traders, Mining and Quarrying, by 46.8% and 24.8% respectively,” statisticians said.

The downturn in diamonds has haunted the local economy since approximately the third quarter of last year, as a slump in retail demand in major markets such as the United States and China, moved up the pipeline to producers such as Botswana.

While government and its diamond production partner, De Beers, had hoped for a turnaround this year, sales have continued lukewarm this year, as the retail end struggles with high inventory. Part of the reason for the glut is the proliferation of lab-grown diamonds, the synthetics that have exploded onto the market since the pandemic.

In the first quarter, according to Statistics Botswana figures, diamond production, the mainstay of Botswana’s economy, contracted by over 27%.

“Diamond production in carats decreased by 27.3% in the first quarter of 2024. “The decline was primarily due to production configuration changes implemented in response to higher than average levels of inventory in the market,” Statistics Botswana researchers said.

The fears of a diamond-led recession are anchored on the poor outlook for the stones for this year, as analysts note that even up to July, sales are declining in volume and value.

“This is leading manufacturers to reduce activity, polish lab-grown diamonds just to keep their workforce busy, and manage inventory with great care,” said prominent diamond analyst, Edahn Golan, in an update issued on Wednesday.

He, however, added that there is some light emerging on the situation, as a retail tracker covering more than 2,000 jewellery stores in the US showed that consumers were spending more on natural diamonds.

Analysts also hope any recovery in diamonds will be met by stronger growth momentum in non-mining, helped by stable water and electricity supply.

The non-mining GDP increased by 2.6 percent in the first quarter of 2024 compared to the 3.7 percent increase registered in the same quarter of the previous year.

Construction is expected to pick up as the record P102 billion expansionary budget announced in February gets through approvals and into the private sector. In the first quarter of 2024, real values added in the construction industry went up slightly by 0.5 percent compared to an increase of 2.7 percent realised in the same quarter in 2023.

According to Statistics Botswana figures, one of the few sectors to perform better in the first quarter of 2024 than the corresponding quarter last year, was Finance, Insurance, and Pension Funding, where growth reached 3.1 percent compared to 2.6 percent.