Deeper into the hole

His­toric con­trac­tions in min­ing and fixed in­vest­ment show SA en­tered the lock­down on shaky ground

Financial Mail - - AT HOME & ABROAD - Claire Bis­seker bis­sek­erc@fm.co.za Gina Schoe­man Kevin Lings

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

SLIP­PERY SLOPE

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

Gold mine

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