Deeper into the hole
Historic contractions in mining and fixed investment show SA entered the lockdown on shaky ground
ý SA’S recession became further entrenched in the first quarter of this year, well before Covid-19 struck, with real GDP growth contracting by 2% quarter on quarter — the economy’s third consecutive quarterly contraction.
But this is nothing compared to the collapse in growth predicted for the second quarter, which coincided with the strictest part of SA’S lockdown. Economic activity is likely to have contracted by more than 30% q/q, which would be a record.
Capital Economics says the first-quarter GDP data supports its view that “SA will suffer one of the biggest blows to its economy from the coronavirus crisis in the emerging world”.
Though the outcome was better than the consensus expectation of -4% q/q, with five industries making a positive contribution to growth, economists are concerned by the sharp slowdown in manufacturing (-8.5%) and collapse in mining activity (-21.5%).
The latter was the biggest slump in six years but was partly due to a steep Covid-related decline in Chinese economic activity and reduction in its demand for raw materials. Manufacturing posted its third consecutive quarter of contraction with lower demand and maintenance stoppages contributing to its poor showing.
Also alarming, because of its importance in supporting future growth and job creation, was the 20.5% q/q contraction in fixed investment spending — its sharpest fall since the global financial crisis. According to Stats SA, this was driven mainly by decreasing investments in machinery, transport, and computer equipment and software.
Economic conditions have to be dire for fixed investment to contract because it suggests that either the government or the private sector, or both, is not maintaining existing plant and machinery, never mind expanding it.
The first-quarter data covers the period from January 1 to March 31, which includes only the first five
days of SA’S lockdown. In April, when the lockdown was at its strictest, the economy came to a virtual standstill, with mining production plunging 30% month on month.
Citibank economist Gina Schoeman estimates that the economy has moved from being roughly 35% open in April, to 60% open in May, to 80%-90% open in June. Even so, she expects that the restrictions will result in secondquarter GDP contracting by at least 36% q/q.
Capital Economics agrees that activity has started to pick up of late, but it still expects SA’S recovery to be “slow going”, noting that travel data to retailers and workplaces suggests that activity remains about 40% below previrus levels.
The Reuters consensus is that GDP will contract by 8% this year, though expectations vary from -10.4% to -5.4%, given uncertainty over just how badly the pandemic is scarring the economy.
One of the few bright spots in the first-quarter release was the volatile agricultural sector, which grew by 27.8% q/q thanks to favourable weather and a rise in agricultural exports.
“While the agricultural sector is experiencing an improved summer season when compared with 2019, this is not nearly substantial
Source: Stats SA
enough to compensate for the sharp decline in almost all other sectors of the economy,” says Stanlib chief economist Kevin Lings.
“Overall, it is clear that SA was under severe pressure ahead of the lockdown and that it pushed the economy into a severe and unprecedented recession that it will take a long time to fully recover from.”
With the exception of retail, which may have benefited from panicbuying ahead of the lockdown, all other segments of the trade sector
(food and beverages, wholesale, motor trade, and accommodation) recorded a decline in economic activity.
Overall, the sector shrank by 1.2% q/q.
Construction registered its seventh consecutive quarter of economic decline, slipping by 4.7% q/q, while softer demand for electricity and water pulled that sector down by 5.6%.
On the other hand, personal services and transport and communications grew by 0.5%; government activity edged up by 1% (partly because of increased hiring by provinces and higher education institutions); and the financial sector expanded by a respectable 3.7%.
Stats SA also measures the expenditure side of GDP, reflecting the demand side of the economy. Though household consumption expenditure remained mildly positive at 0.7%, expenditure on GDP decreased by 2.3% q/q in the first quarter, dragged down mainly by investment spending and inventory drawdowns of more than R67bn.
Given the better-than-expected GDP outcome, some economists may revise up their whole-year growth forecasts slightly. But with the lockdown data still outstanding, SA should brace for the recession to enter a frightening new phase. The worst is yet to come.
SA was under pressure ahead of the lockdown and it pushed the economy into a recession that it will take a long time to recover from