The horror, the horror: SA’s record GDP plunge

SA imposed one of the harshest Covid-19 lockdowns worldwide and is now reaping the costs with a dramatic contraction in second-quarter real GDP growth, which will further dent sentiment and SA’s recovery prospects.

According to Stats SA, the economy slowed quarter on quarter by a worse-than-expected 51% at a seasonally adjusted annual rate (Saar), marking SA’s fourth consecutive quarter of economic contraction.

This is worse than the Reuters consensus expectation for a 44.5% contraction and translates into an unadjusted contraction of 17.1% year on year. On a nonannualised basis, the economy slowed 16.4% in the second quarter compared with the first.

In nominal terms, SA’s GDP was R1.08-trillion in the second quarter, R201bn down on the first quarter, almost entirely because of the pandemic.

The second-quarter contraction is SA’s biggest on record (since -8.5% in the fourth quarter of 1982) and is likely to cause some economists to revise down their whole-year forecasts. Until now, the consensus was for the economy to contract 8% this year. Nedbank was looking for -8.1% but now fears that the contraction is likely to be closer to -9% or -9.5%.

The National Treasury’s June forecast, on which many of SA’s fiscal targets depend, was for GDP to contract 7.2% this year. That estimate is now looking too optimistic.

"The huge fall in the second quarter confirms our pessimistic outlook for the economy and, with fiscal austerity on the horizon, the recovery will be weak," says Virág Fórizs, Africa economist at Capital Economics.

The Capital Economics Covid mobility tracker, which is based on travel data to retailers and workplaces, suggests that economic activity remains well below pre-pandemic levels. Moreover, car sales were down 26.3% year on year in August, and the resumption of load-shedding will also weigh on the recovery, says Fórizs.

Stanlib chief economist Kevin Lings warns that the longer SA takes to implement economic reform, the more damage will there will be. "There remains a not-insignificant risk that without positive policy intervention, the economy enters a self-reinforcing downward spiral with successive job losses resulting in further economic weakness, which leads to more job losses," he says.

The only silver lining is that the GDP shock might prompt the Reserve Bank to revise down its -7% growth forecast for the year, allowing it to cut rates again at its September meeting.

In the second quarter, the largest drag on growth came from the manufacturing, trade and transport sectors, which slowed 74.9%, 67.6% and 67.9% respectively, as the lockdown brought them to a virtual standstill. Together these sectors erased 27.9% from the headline GDP print.

Also hard hit was mining, which slowed 73.1% quarter on quarter, while the relatively small construction industry plummeted 76.6% — its eighth consecutive quarter of decline since the second quarter of 2018.

Agriculture, up 15.1%, was the only positive contributor to GDP. However, because of its small size, it added only 0.3 of a percentage point to the quarterly growth rate.

Overall, the industrial sector (-72%) was worse affected by the lockdown than the services sector (-40%).

Among the least affected was the finance, real estate and business services sector, which slowed only 28.9% thanks to its white-collar workforce mostly being able to work from home.

Measured from the expenditure side, real GDP contracted 52.3% quarter on quarter on a Saar basis and by an unadjusted 17.6% year on year. Government expenditure mostly held up, but fixed investment and household consumption collapsed.

Household spending plummeted 71.4% for transport, 91.5% for clothing and footwear and 99% for restaurants and hotels. The alcohol and tobacco bans slashed spending on these items 92.4%, which alone shaved seven percentage points off the household spending figure.

Only spending on utilities, computers, communication and educational services increased as many people started working from home, but final household consumption expenditure slowed almost 50% regardless, accounting for 30 percentage points of the headline contraction in GDP.

More recent data suggests that the economy is still battling to get back on its feet and that the lockdown has inflicted substantial damage to employment and consumer confidence — the latter was still deep in negative territory in the third quarter.

The consensus view is that economic activity in SA is only likely to return to pre-Covid levels by 2023.

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