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GDP shrinks to 2005 levels

‘We haven’t really done as much as we should have to address the structural issues that we had at the beginning of last year’: Maarten Ackerman, chief economist, Citadel.

NOMPU SIZIBA: South Africa’s economy contracted by 7% in 2020, compared to 2019. Stats SA released GDP data for the fourth quarter, showing that in the quarter October to December 2020 the economy grew by 1.5%, compared to the third quarter. When compared to the fourth quarter of 2019, growth was up 6.3%. The 7% contraction in 2020 is reflective of the havoc that the Covid-19 pandemic has wreaked on the local economy, which has resulted in businesses having to shut shop, jobs decimation and serious income cuts.

Well, to discuss the finer detail from the latest Stats SA report, I’m joined on the line by Maarten Ackerman, chief economist at Citadel. Thank you very much, Maarten, for joining us. The annual contraction of 7% is hardly a surprise, as estimates had been around there, although slightly higher or slightly worse. So I would imagine that if you were to look at this on a graphical picture it looks really bad, but obviously this is all a legacy of Covid-19.

MAARTEN ACKERMAN: Yes, good evening. I think the -7% is slightly better than expected. In the middle of last year, in the middle of the pandemic, expectations were anything between -8% and -9%. So that number is slightly better. If you think about that in the budget also, the better than expected revenue collection is on the base that the economy doing better in the second part of 2020.

But you are one hundred percent right. If you look at that number of -7% on the long-term graph, it’s the worst number in more than a century, and the last time we saw similar numbers was only in 1920. So this is unusual and obviously it is because of the pandemic that had a massive impact all around the world.

Our numbers, unfortunately, are looking a little bit worse than our peer group and that’s simply because [before the crisis we were in recession] as you would have seen in the quarter beginning of last year. So not a great number, but under the circumstances something that one can understand.

NOMPU SIZIBA: So if we can examine the fourth quarter picture, what were the key takeaways for you? And before the adjusted Level 3 lockdown towards the end of December, it does seem like there was some sort of momentum happening in parts of the economy, especially manufacturing.

MAARTEN ACKERMAN: Yes, I think you’ll remember that we had a very strong first quarter and the 6%, 6.3% for the last quarter is on top of that strong third quarter. So it clearly shows that the momentum going into the end of last year was very strong, also fairly broad-based across sectors. It was only mining that really still trended to the negative. And in the quarter itself we [didn’t] really have anything like load shedding, and the types of lockdown restrictions only came very late in December. I think a group called the *** obviously talking about the first quarter of this year, 2021, that’s already going to be slightly different because we had load shedding, for a big part of it we had some additional lockdown restrictions. There were a couple of tailwinds that have helped us to actually get this very positive number as a result.

NOMPU SIZIBA: Now, the GDP report also looks at expenditure across the economy, the household sector registering spending growth of 7.5% in the quarter. Given the importance of consumer expenditure to the economy was that, do you think, a decent performance under the circumstances?

MAARTEN ACKERMAN: Well, we need to keep in mind that, you know, these numbers, there is a statistical basis set coming in and we need to keep that in mind as well for the rest of 2021 we are measuring now [off] a very low base. Like I said, probably the lowest base that we’ve seen in 100 years. So the 7.5% is a strong number for the consumer.

But my fear is that after the base effect has worked out, that number is likely to drop back to numbers we saw over the last five years, which will be a true reflection of the unemployment, the difficult financial position, and, and, and.

But yes, for now it definitely shows that consumers are also standing up and then those that are fortunate actually have an income or maybe get a job back, as that will contribute to the economic recovery today.

NOMPU SIZIBA: When it comes to gross fixed capital formation, which basically speaks to investment in the real economy, that was up a mere 12.1%. It’s a number that’s been problematic for economists for the longest time. But often you guys do say that the reason why people are not investing heavily in infrastructure and factories and all the rest of it is simply because there isn’t the confidence to do so.

MAARTEN ACKERMAN: I think [regarding] that number also … keep in mind that it’s coming off that very low base we just spoke about…. Historically for the last five years we’ve really struggled to get positive numbers on a quarterly basis. If I recall correctly, during the course of 2019 we had one or two positive quarters. We now had two positive quarters, but this is basically the ripple effect that’s coming through. I’m still concerned that not enough has been done, like you said, to rebuild trust and confidence for this number to sustainably be a positive number to pave the way for better growth. That’s something that we really need to see going forward. The Treasury, in their economic forecast in the budget, also expected very strong growth for 2021, which is promising. But then the number in three years dropped to 1.6%. I also question if you’re are going to implement reforms, if you are serious about making changes, one would expect that in three years’ time the economic growth will at least be better than 1.5%.

NOMPU SIZIBA: That’s the worry that suggests that National Treasury isn’t confident that we’re going to see those structural reforms. So, from where you’re standing, are we on track to achieving more than just a statistical base-effects’ growth for 2021, or are we going to achieve just that?

MAARTEN ACKERMAN: I think the reality at this point in time is that, if you take out this statistical effect, then we haven’t really done as much as we should have to address the structural issues that we had at the beginning of last year. So last year we were already in a low-growth environment. In fact, we were in a recession; for five years we battled to get growth more than 1.5%. And to get those hurdles out of the way is obviously going to delay that as well. We haven’t done that yet.

So we’re going to see stronger growth now, given that the economy’s opening up and we are measuring from that low point. But after that, we are back in the same kind of game. And so we are probably going to see low growth for another two or three years,

Having said all of that, I don’t want to sound negative because there are some reforms taking place as we speak. There are things happening on the ground. But one needs to keep in mind that these kind of reforms are longer-term reforms.

So Covid aside, if we do the right things in the next year or two you will only see those positive changes in the real economic numbers for probably years to come. It’s not something that’s going to happen over a quarter.

So I still think we are moving in the right direction. In some cases people or business probably want it to be a little bit faster than we’ve seen so far, but it’s not like nothing is happening here. There are some good changes taking place, and I’m still confident if we can stay on this path we can stick to the fiscal framework and avoid a debt spiral or debt crisis [and] eventually we will see that that growth picks up to more sustainable longer-term numbers.

NOMPU SIZIBA: Maarten, Thank you very much for your time, sir. That was Maarten Ackerman. He’s the chief economist at Citadel.

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