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Despite Q3 bounce, South African economy in contraction
December 9, 2020, 8:06 pm

The seasonally adjusted annualised quarterly bounce was 67.6 per cent, but the year ago decline was 6.4 per cent 

Ramaphosa has a significant challenged ahead to spark life in the South African economy [GCIS]

The South African economy staged a record 67.6 per cent seasonally adjusted annualised quarterly bounce in the third quarter 2020 measured from the expenditure side after an unprecedented 53.7 per cent contraction in the second quarter. These growth rates must be treated with caution as seasonal adjustment is only valid if conditions remain stable, but the national lockdowns to cope with the Covid-19 pandemic are not “normal”.

This would be the equivalent of moving Christmas and its related spending surge to February instead of December. A better reflection of the impact of the national lockdowns is to look at the year ago figure and that shows a 6.4 per cent contraction in the third quarter after an 18.2 per cent plunge in the second quarter. This brought the decline in the first nine months of 2020 to 8.5 per cent.

Only India among BRICS member countries had a more severe decline in the third quarter with a 7.5 per cent year-on-year (y/y) decrease, while China had the best performance with a 4.9 per cent y/y increase.

South Africa had one of the earliest and most severe national lockdowns in the world. Despite the lockdown, South Africa’s number of infected cases surged to the fifth highest in the world in July but has since eased to the 14th highest. The number of confirmed Covid-19 cases dropped to 725 on 21 September from a peak of 13 944 on 24 July, but then rose to 4 011 on 8 December. 

South Africa’s economy was helped by a boom in exports in part due to China’s recovery as well as a policy decision by the Chinese authorities to lessen their dependence on Australian imports, so Brazil and South African iron ore producers have benefited from this trade diversion.

Gross domestic expenditure (GDE) therefore had a more severe contraction than gross domestic product (GDP) in part due to another large drawdown in inventories as factories and mines resumed production in the third quarter after the second quarter disruption. GDE was down 11.4 per cent y/y in the third quarter after a 17.3 per cent y/y decline in the second quarter. The main “culprit” of this decrease was capital formation which plunged by 43.3 per cent y/y in the third quarter after a 35.3 per cent y/y slump in the second quarter. 

Sanlam Investments economist Arthur Kamp told The BRICS Post that he was worried about the tourism sector and the large government borrowing requirement that made South Africa more reliant on foreign funds inflows.  

“South Africa’s economic recovery is following similar lines to elsewhere in the world, led by a sharp increase in the goods producing sectors, while parts of the tertiary sector lags. Although trade has bounced along with personal services, the recovery is far from complete amongst the tertiary industries, notably tourism accommodation,” he said.

Kamp also pointed out that this still appears to be the case early in the fourth quarter. He cited Statistics South Africa tourist accommodation data for October 2020 which shows that the industry occupancy rate is just 22.7 per cent, while income from hotel accommodation was still 71.9 per cent lower than a year ago in the same month.

“The bounce in exports is, however, is especially noteworthy, reflecting not only a post-Covid-19 bounce, but also increases in commodity export prices. If the latter holds up, this should add significantly to purchasing power as we head into 2021, supporting domestic demand, including consumption. One key caveat is that, considering a still large government borrowing requirement, we must attract sufficient foreign capital inflows to supplement domestic savings. If not, the upswing is at risk of fading,” he said.

The Nedbank Group Economic Unit expected the recovery to continue in part helped by stronger growth in trading partners.

The recovery is expected to continue albeit at a much slower pace, the unit said.

It said that production in most sectors will probably continue to normalise in the final quarter, supported by stronger global demand and firmer commodity prices.

However, underlying structural constraints will still weigh on output, the unit warned.

On the consumption side, consumer spending is expected to be supported by low interest rates and subdued inflation. However, the increase will be limited by a weak job market, which depress consumer incomes and confidence. The outlook for private sector investment spending remains bleak due to limited progress with structural reforms and fiscal consolidation, with private sector likely to be crowded out of the capital markets. General government spending will be limited by the urgent need to for fiscal consolidation. The country’s net export position is forecast improve given recoveries among South Africa’s key trading partners,” the unit wrote.

Geoff Nölting, First National Bank economist welcomed the third quarter data, but warned that it would take the South African economy many years to return to the 2019 output.

 “We welcome the stronger-than-anticipated recovery in the third quarter 2020 and have upwardly revised our 2020 forecast to reflect that GDP growth will likely contract by around 7.2 per cent y/y (previously -7.5 per cent) this year. However, without meaningful structural reforms, it will take many years for the economy to fully recover to pre-pandemic levels,” he wrote.

 Helmo Preuss in Shaka’s Rock, South Africa for The BRICS Post 

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