Recession due to lockdown
GDP plunges by 51% due to pandemic
THE plummeting by 51% of the country’s gross domestic product (GDP) has sunk the economy deeper into recession and analysts and economists are blaming it on the hard lockdown as a result of the Covid-19 pandemic.
While many were surprised by the fall of the GDP, economist Hugo Pienaar said that while the GDP figures were not the worst South Africa had seen, they ranked among the most severe globally.
“A particularly strict lockdown and pre-Covid vulnerabilities helps to explain this. The level of GDP is 8.7% lower in first six months of 2020 compared with same period in 2019.”
Business Leadership South Africa chief executive Busi Mavuso said: “We hope this proves to be sobering for pol- icymakers. We hope they refocus their energies on undertaking structural reforms in electricity, labour regulations and spectrum allocation.
“Over the past week we were reminded of the need for urgent reforms with the return of load shedding just when we were hoping for a strong increase in economic activity in the final months of the year after the hard lockdown,” said Mavuso.
“Unreliable electricity supply has fed into persistently weak business confidence and, in turn, investment, growth and job creation,” said Mavuso.
“The plans to restructure the electricity sector have for the most part been considered and drawn up by the Mineral Resources and Energy Ministry. It is essential they are now implemented to give the economy a fighting chance of recovery within the next two years,” said Mavuso.
Statistician-General Risenga Maluleke said this was the fourth consecutive decline in quarterly GDP since the second quarter of last year.
“The manufacturing industry contracted by 74.9% in the second quarter. All 10 manufacturing divisions reported negative growth rates in the second quarter. The trade, catering and accommodation industry decreased by 67.6%.
“Decreased economic activity was reported in wholesale trade, retail trade, motor trade, catering and accommodation,” said Maluleke.
“The agriculture, forestry and fishing industry was the only positive contributor to GDP growth, with an increase of 15.1% and a contribution of 0.3 of a percentage point to GDP growth. The increase was mainly due to increased production of field crops and horticultural and animal products,” said Maluleke.
President Cyril Ramaphosa announced a Presidential Employment Stimulus which starts next month and which he said would expand opportunities through public and social employment to counteract job losses. “As the epidemic continues to stabilise, a strong recovery is possible through targeted actions to restore economic growth and protect the livelihoods of our people,” said Ramaphosa. Premier Alan Winde said the data showed the severe impact of the hard lockdown. “Thousands of people across the country have already lost their jobs as a result of the hard lockdown and we must avoid further job losses. We continue to focus on keeping the people of this province safe and healthy. But we must put the same energy and determination into ensuring that we are able to save jobs and avoid the second, unemployment pandemic.”
Deon van Zyl, the chairperson of the Western Cape Property Development Forum, said the drop in GDP reflected not only on the current economic crisis, but the ongoing systemic bureaucratic challenges that South Africa faced and which continued to undermine economic development and job creation.
“We hope this proves to be sobering for policymakers Busi Mavuso BUSINESS LEADERSHIP SOUTH AFRICA CEO
THE LATEST gross domestic product (GDP) figures have laid bare the grim reality of Covid-19’s effects on the economy, revealing an unprecedented 51 percent decline in economic activity in the second quarter (quarter on quarter, seasonally adjusted and annualised).
This number is hardly surprising given the impact of the virus and lockdowns on economies around the world. Of far greater concern is that South Africa was battling a recession before the pandemic hit, which means the virus may finally have tipped the economy over the edge into a depression – with alarming implications for the country’s fiscal health.
South Africa already printed two quarters of negative economic growth in the second half of last year, and this declining trend carried on into the first quarter of this year. In fact, the year-on-year figure, which reveals a 17.1 percent decline in GDP over the 12 months to the end of June, is perhaps even more telling than the quarterly figure.
So, even without the burden of Covid-19, the economy would likely have continued to decline in the second quarter of this year. Arriving on top of these pre-existing structural issues, Covid-19 was simply the straw – or rather the sledgehammer – that broke the camel’s back, resulting in these shocking second-quarter figures.
Although we can expect a sharp rebound in the third and fourth quarters with the gradual reopening of the economy (coming off a low base), the reality is that we can still expect the economy to shrink some 8 percent this year – worse even than the 6 percent decline recorded during the Great Depression of the 1930s.
Again, the extent of this decline is arguably more attributable to the action taken to close down the biggest part of the economy rather than a result of economic factors. But ultimately, until the country implements the reforms already on the table and addresses the structural issues keeping economic growth below capacity, we will continue to see increasing unemployment, inequality and poverty.
Of additional concern is the impact of this economic shock on the fiscus – a 51 percent drop in the second quarter’s economic activity will immediately raise the alarm for revenue collection. Given the fact that most public service workers received salaries during the lockdown, and that government expenses have continued to rise even as revenue has fallen, it was inevitable that the government would need to seek additional funding.
And although we received a loan from the International Monetary Fund, the government is now looking to borrow even more just to cover the gap for this short period of time.
In other words, the shock isn’t so much the -51 percent figure itself, but the implications of this for turning the economy around. The reality, once again, is that we need to address the massive challenge of the crocodile jaws closing around the economy by reigniting growth – an underlying challenge made even more difficult by the burden of Covid-19. This, in turn, will grow revenue collection and help to reduce the budget deficit.
A closer examination of the impact of Covid-19 on various industries reveals that the primary and secondary sectors declined far more than 51 percent over the quarter, recording -59.1 percent and -72 percent growth for the second quarter, respectively. This underscores the impact of the lockdown on industries that were forced to close or limit operations during lockdown, such as mining (-73.1 percent), manufacturing (-74.9 percent), and construction (-76.6 percent).
The tertiary sector, on the other hand, recorded only a 40 percent decline (quarter on quarter, seasonally adjusted and annualised), largely as a result of the contribution of essential services that continued to function even during level 5. Industries that contributed to this number included personal services (-32.5 percent), finance (-28.9 percent), and electricity, gas and water (-36.4 percent). Significantly, the only positive contributor for the quarter was the agricultural industry, which (coming from a low base in the first quarter) printed 15.1 percent growth.
In terms of expenditure, government expenditure actually declined slightly by 0.9 percent quarter on quarter, remaining almost flat, while households and exports saw expenditure down 49.8 percent and 72.9 percent, respectively. Again, these are shocking numbers, but hardly surprising within the context, given that restaurants and hotels were forced to close (resulting in a 99.9 percent decline for the quarter), and the sales of alcoholic beverages and tobacco was banned, resulting in a 92.4 percent drop in consumption.
As we reopen these parts of the economy, we may see the V-shaped recovery in the third and fourth quarters analysts have spoken of in other countries. This will pave the way for a slow upturn next year. But, at the risk of sounding repetitive, the government urgently needs to turn its attention to removing the structural impediments strangling growth if we are to achieve above capacity growth and create a more inclusive economy.