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South African economy has unprecedented collapse in Q2
September 14, 2020, 8:37 pm

Only India among BRICS countries had a more severe contraction

The National Treasury building in Pretoria [PREUSS]

The South African economy suffered a 17.6 per cent year-on-year (y/y) decline in the second quarter. Only India among the BRICS had a more severe contraction with a 23.9 per cent y/y slump. Brazil has an economic structure similar to South Africa and it suffered a 11.4 per cent y/y decrease as it the lockdown in that country was not as severe as South Africa’s. Russia had a 8.5 per cent decrease, while China’s economy grew by 3.2 per cent y/y in the second quarter.

A more appropriate comparison for China would be the first quarter as it imposed selected lockdowns then after the COVID-19 virus emerged in Wuhan. In the first quarter, the Chinese economy fell by 6.8 per cent y/y.

South Africa responded swiftly to the COVID-19 pandemic, but the sharp drop in economic activity added to long-standing challenges such as poor availability of power and raised the urgency of structural reforms, the Organisation for Economic Cooperation and Development (OECD) said on 31 July.

The nationwide lockdown enacted from 27 March 2020, a mere three weeks after the first reported case, reduced activity in mining and industry while bringing the tourism, entertainment and passenger transport sectors to a near-standstill.

OECD Economics Department Country Studies Director Alvaro Pereira said: “South Africa cannot afford to delay reforms. It is essential to undertake reforms to restore long-run fiscal sustainability and growth, while continuing to support the economy in the short run.”

The OECD said that a sound growth strategy, which included reforming product markets, boosting investment, infrastructure development, trade policies that augment the benefits from participation in global value chains, more competitive sate-owned enterprises (SOEs)?, could deliver quick wins in terms of job creation and increase potential growth. Efforts to improve the business climate, sequencing and prioritisation of reform will be essential for maximising the growth impact.

Measured from the expenditure side, the economy contracted by 52.3 per cent quarter-on-quarter (q/q) on a seasonally adjusted annualised (saa) basis, while if measured from the production side, the decline was 51.0 per cent. As only about half of the economy is tracked on a monthly basis by Statistics South Africa, the range of forecasts was large between a 30 per cent contraction and a 63 per cent slump.

The Reuters consensus forecast was for a 44.5 per cent decline.
Elna Moolman, an economist at Standard Bank, said the actual outcome was very close to their forecast of a 50 per cent contraction on a q/q saa basis.

“The production-side estimates also showed sectoral performances that broadly matched our expectations, except for a slightly shallower contraction in the personal services sector than we expected and slightly worse performance by the government services sector. From the expenditure perspective, the gross fixed capital formation (GFCF) contraction was modestly deeper than we expected while household consumption expenditure (HCE) contracted slightly less than we expected. Investors were already starting to discount another 25 basis points rate cut, and the possible downward revision to the South African Reserve Bank (SARB) gross domestic product (GDP) forecasts in response to this release may further fuel the expectation for more support,” she told The BRICS Post.

Sanlam Investment economist Arthur Kamp was very concerned about how long it would take the economy to return to the pre-pandemic level.

“One particular concern is fixed investment spending. The 59.9 per cent annualised decrease in gross fixed capital formation in the second quarter was not a surprise, given the extensive closures in industry. Also, with the balance of payments under pressure the required macroeconomic adjustment was always going to occur, to a material extent, through a fall in fixed investment spending. But, looking ahead there is a concern. Given the size of the expected general government borrowing requirement, which can be expected to absorb a large slice of available resources, fixed investment spending is likely to remain palpably weak into next year. This calls into question the ability of the economy to deliver a robust recovery along with the concomitant much-needed employment growth,” he told The BRICS Post.

Auditing firm PwC chief economist Lullu Kruger said the easing in lockdown restrictions recently should result in a q/q saa bounce back in the third quarter, but that the worse than expected decline in the second quarter could lead to further downward revisions in full year 2020 GDP forecasts.

“The SARB said in July that it expects the economy to contract by 7.3 per cent this year. However, the 51.0 per cent q/q saa contraction in Q2 GDP is more severe than the 32.6 per cent decline that the central bank was expecting for the period. As such, it is expected that the SARB Monetary Policy Committee (MPC) will revise its 2020 GDP forecast when the body meets again next week and forecast a deeper recession for the year. PwC is of the view that this, combined with still-low inflation readings at the bottom end of the SARB target range, could open the door for additional interest rate cuts in the short term,” she wrote.

Steel and Engineering Industries Federation of Southern Africa (SEIFSA) chief economist Michael Ade said the lockdown restriction had a severe impact on the profitability of the manufacturing sector as it still incurred costs such as rent and labour, but in many cases could not sell anything except essential goods.

“In addition, production costs in the second quarter of 2020 were higher than in the first quarter, as scarcity and higher demand for inputs pushed prices and operational expenses up. Companies were in uncharted territory where they had to still incur costs, despite the lockdown, but could not produce and sell. The situation was made precarious by prevailing subdued domestic demand and the companies’ inability to explore new markets or export. These impediments also affected their margins negatively,” he said.

Citadel Wealth Management chief economist Maarten Ackerman said there was an urgent need to implement the structural reforms that have been talked about for years.

“We’ve already had a K-shaped economy, with a massive gap between the have and have nots, and that is something that we need to fix going forward by driving inclusive growth. And the only way we can do that is by seeing the necessary reforms implemented with urgency in order to achieve economic growth above population growth levels, closing the social inequality gap,” Citadel Wealth Management chief economist Maarten Ackerman said.

He added that South Africa has all the right plans to reignite economic growth and restore confidence, but lacks the same track record in implementation.

“The structural issues that we are currently grappling with are the same problems that have been raised for years. In terms of government finally implementing the necessary reforms, it is not necessarily confidence but rather hope that the urgency of the situation will finally translate into political will,” he told The BRICS Post.

Helmo Preuss in Makhanda, South Africa for The BRICS Post

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