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Economy probably contracted by 7% last year

Economists expect further recovery in the final quarter of 2020 to be announced on Tuesday, but it will take years to reach pre-Covid levels.
The severity of the expected contraction makes the economic shocks of 2009 look mild. Image: Waldo Swiegers, Bloomberg

Economists generally expect that the economy would have continued its recovery in the last quarter of 2020 – with forecasts mostly around the 5% level – but that the Covid-19 pandemic would see gross domestic product (GDP) shrink by around 7%.

Statistics SA will announce the GDP figures for the final quarter of 2020 and the year as a whole on Tuesday (March 9).

Hugo Pienaar, chief economist at the Bureau for Economic Research, says the team at the University of Stellenbosch expects further economic recovery in the fourth quarter of 2020, but that the figure will not be as strong as the growth in the third quarter compared to the second (when the economy recorded annualised ‘growth’ of more than 66% after the decline of 51% in the second quarter).

The figure to watch

The important figure to watch is the annual growth, which Pienaar says will show that the economy shrank by around 7% compared to 2019, under the assumption that the economy expanded by 5% to 5.5% in the last quarter compared to the preceding three months.

“Actually, it doesn’t really matter if growth in the last quarter was 3% or 6%, the figure for the full year will be around minus 7%,” says Pienaar.

“It will take the SA economy several years to recover to the levels of 2019,” he adds, “based on general forecasts of economic growth of 3% this year and 2.5% next year.”

Pienaar expects total GDP to only recover to pre-Covid levels by the end of 2023 or the beginning of 2024.

The big question

Moneyweb dared to ask what is necessary to stimulate economic growth, fully aware that there is a long list of economic ills.

“I can mention a lot of stuff, but two things stand out,” says Pienaar.

“Number one is that we get enough vaccines and good cooperation between government and the private sector to roll [the vaccination programme] out efficiently. That is the biggest boost we can give the economy.”

It stands to reason that confidence will improve and economic activity will pick up when the pandemic is brought under control.

Read: South Africa’s vaccine rollout programme to get R500m boost

“The second, and equally important [requirement], is that we solve SA’s energy situation,” says Pienaar.

“There is a lot to do. Even if Eskom gets its house in order, we will still have a shortage. We need regulatory changes to enable private generation and [to] deliver energy into the national grid. It is of critical importance over the next 12 to 18 months.”

Enabling private electricity generation will in itself stimulate fixed investment and create jobs.

FNB’s economists sing from the same music score. Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi and Thanda Sithole say about the upcoming GDP figures: “Some green shoots, but still a long road to full recovery.”

Resilience and capacity

They conclude in a recent research note that the release of GDP data on Tuesday will show how resilient various economic sectors were in the last quarter while lockdown restrictions were still in force. More importantly, they say, the data will give an estimation of how much capacity the economy lost in 2020.

“At the start of the pandemic, real GDP loss estimations were large but were subsequently revised lower as economic activity disruptions became less severe than initially feared.”

The authors of the note add: “Indeed, the considerable reduction of interest rates and other monetary policy measures by the Reserve Bank provided much-needed support to households and businesses through, among other things, lower debt-service costs and lower total costs of new debt.

“The external economy also remained supportive, particularly in the third quarter of 2020, when exports contributed a significant 38.3 percentage points to real GDP growth. Recent data shows that this trend might have continued into the fourth quarter, albeit at a slower pace.

“We pencil in quarterly annualised growth of around 6%, which effectively implies that real GDP likely contracted by about 7% in 2020,” they say.

Supportive factors

Going forward, FNB expects economic recovery to be supported by a recovery in global demand, as well as sustained domestic monetary policy accommodation. However, the bank’s economists expect a long and difficult recovery to the levels of 2019 “as the pandemic has had a deep and lasting impact on incomes and employment”.

Johann van Tonder, economist at Momentum Investments, also expects the SA economy to have registered positive economic growth in the fourth quarter of 2020.

“Initial indications from high frequency data are that manufacturing production, retail sales and electricity production grew by an annualised and seasonally adjusted rate of respectively 22.3%, 11.5%, and 3.2%, while a nominal trade surplus of R102 billion was registered.”

Van Tonder notes that National Treasury recently adjusted its estimates for GDP growth in 2020 to a negative 7.2% compared to negative 7.8% earlier.

“Treasury also tabled a budget with an estimated economic growth rate of 3.3% in 2021, slowing to 2.6% in 2022,” he says.

Once again the annual figure is the one to watch.

A graph presented by Stats SA when it announced the GDP figures for the September 2020 quarter shows just how irrelevant the large decline in the second quarter and the recovery in the next quarter of 2020 are over the longer run.

Quarter-on-quarter percentage growth in GDP

Source: Stats SA

Looking at the annual figures shows that the SA economy has performed badly over the last decade.

While it grew in 2010 – relative to the shock in 2009 when the world was rocked by the aftermath of the 2008 property and banking crisis in the US – GDP growth has declined year after year since.

Annual GDP growth

Source: Stats SA

The graph also shows the severity of the expected contraction of 7% in 2020 – making the disaster of 2009 look mild.

“It will take difficult decisions and drastic action to get the economy back on track,” says Pienaar, without mentioning the stumbling block most people see – the fact that government lacks the political will to make unpopular decisions and implement them.

Listen to Nastassia Arendse’s interview with Duncan Pieterse, deputy director-general of economic policy at National Treasury (or read the transcript here):

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Adriaan, if I am blind, I still would not believe the 7%.
Walk around towns/cities (with your eyes open) and see how many businesses are closed.
Do a before and after lockdown analysis of open/close businesses.

A Finfind & Department of Small Business Development survey found that by end Nov 2020 a total of 42.7% of South African SMEs had shut down due to the economic crisis and difficult trading conditions brought about by government’s lockdown and response to Covid19.

Close to -10%. So many business blocks for rent/sale

https://tradingeconomics.com/south-africa/gdp-growth-annual

Since 1995 South Africa has experienced an average GDP of about 2.3% whilst inflation has averaged 5.8%, this means that government has been expropriating 3.3% of gdp through inflation.

This idea that inflation occurs naturally through market price is only partly correct where as since the competitiveness of prices are taken out of the equation and replaced with government money printing that is where the inflation occurs. That is why is called Expropriation Through Inflation.

Hopefully the Zondo Commission will either lockup those involved in corruption or at very least ban them from taking public office.

The only way South Africa will every be free is when all of us are measured by the same yardstick from politicians to business people and citizens. That means no more Ruling Party; Race Based Employment Quotas; Assured and Protected Property Rights. Hopefully it will not take 43 years… Apartheid was wrong and so is poorly functional Reverse Apartheid.

The latest free market index report shows that South Africa has increased 7 places from 106 to 99, this was maining due to judicial effectiveness. Property Rights and in general Rule of Law are below 60 points.

https://www.heritage.org/index/ranking

Although 7% is to me far below a realistic % of what actually happened in sa from top to bottom to its economy, sars kieswetter and company will also have to bring that hard fact into account, no profit, no tax – pitty is the government spending side don’t want to accept that fact – to them its as if the economy can be turned back on to the good old days by the flick of switch (for sure not an eskom one) – in real life it simply does not work that way, rather a much slower process if at all in sa

Add on population growth and GDP per capita after inflation has been falling and rapidly and dramatically as we get poorer thanks to the gangster regime with its failed policies, captured judiciary and inherently corrupt leadership.

I listened to Frans Cronje recent 1 hour podcast listen and FLEE if you can:
https://www.youtube.com/watch?v=OfVp3tPod5k

Never in a month of Sundays did the economy contract 7% last year. It is definitely double digits, more likely between 12%-18%.

Regardless of the actual fall last year and if we can recover to 2019 levels the issue remains the long term outlook for the economy. For me I see a couple years of limited growth followed by the old familiar pattern of sub 1% growth if any at all. Government finances will continue to deteriorate every year with Mboweni’s debt forecasts not realizing nor stabilizing. The proverbial pawpaw will hit the fan when the government can no longer pay the combination of public salaries, grants and debt servicing cost. At this stage the newly nationalized SARB will start printing money like there is no tomorrow in order to keep government solvent, the effect of runaway inflation and currency devaluation will be passed onto the economy and ordinary citizens who will lose the value of all their savings with their salaries becoming utterly insufficient to buy even the most basic of goods. This will result in economic collapse and 90% unemployment as enjoyed by our northern neighbors.

Maybe I’m wrong and actually I truly hope I’m wrong, but as long as this is the trajectory I will not only leave all my investments directly overseas but will continue to emigrate as much money as I can every year while the SARB still allows this. The problem with people who are still hesitating to financially emigrate is that when the collapse becomes inevitable and certain the SARB will stop all opportunity for ordinary citizens to financially emigrate and their funds will be stuck in SA.

I fear that you could be right.

Proudly brought to you by the ANC…

End of comments.

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