The headline ‘Magnitude of GDP collapse expected, but still shocking’ on NKC African Economics analyst Jacques Nel’s research note probably best sums up the reaction to the 51% drop in quarter-on-quarter growth for the second quarter.
The gross domestic product (GDP) figure put out by Statistics SA on Tuesday morning was widely expected to show a drastic cut, but this did not minimise the reaction of disbelief to it.
This figure is the first to scale the extent of the economic decline resulting from the five-week Covid-19 lockdown in the first half of the year, which was meant to stem the spread of the deadly virus.
The move came at a price to the economy.
All sectors saw huge fall-offs in economic activity except for the agriculture, forestry and fishing industry. The manufacturing industry contracted 74.9%; the trade, catering and accommodation industry decreased 67.6%; and the transport, storage and communication industry dropped 67.9%.
There was a similar story with the mining and quarrying industry, which fell 73.1%, while the finance, real estate and business services industry was down 28.9%. The agriculture, forestry and fishing industry increased 15.1%, but this only contributed 0.3 of a percentage point to GDP.
The impact of the lockdown on ordinary South Africans can be seen in household final consumption expenditure (HFCE) plunging 49.8%, contributing -30.8 percentage points to total growth.
Having people locked indoors for over a month resulted in transport expenditure dropping by 71.4%; clothing and footwear by 91.5%; and alcoholic beverages, tobacco and narcotics by 92.4%.
The scale of the blow to the economy is so huge even the presidency felt compelled to put out a statement on it.
“The coronavirus represents a once-in-a-century social and economic crisis, with disruptions to production, a synchronised decline in export markets and a prolonged decrease in demand for many service industries. The economic circumstances created by the pandemic have caused hardship for many South Africans, and threaten the survival of businesses in sectors that are worst affected.
“Having acted swiftly and decisively to save lives and bring the epidemic under control, government’s focus now is on economic recovery.
“The R500 billion emergency relief package announced by the president in April has prevented the worst effects of the pandemic.”
The presidency may be compelled to talk up the country’s resilience, but despite the assistance, the Covid-19 crisis undermined the government’s efforts to get the country’s economy going.
Investment was in reverse
This can be seen in gross fixed capital formation, a measure of real investment, decreasing 59.9% for the period.
Stats SA said the main contributors to the decrease were construction works, machinery and other equipment, residential buildings, transport equipment, and non-residential buildings.
The closing of the country’s borders also had a knock-on effect. “Weak imports of machinery and other equipment, as well as transport equipment, contributed to the decrease in gross fixed capital formation.”
Slow bumpy recovery
Although things were really bad in the second quarter, they are expected to ease in third. Even so, NKC’s Nel notes that “the recovery will not be as uniform, as some sectors, while permitted to operate, will still contend with a challenging economic environment”.
This view is shared by the Nedbank Group Economic Unit, which said the growth outlook for the remainder of this year remains relatively subdued, although a recovery is expected.
This recovery, however, will be anything but speedy. “The resumption of load shedding, the public sector’s dismal fiscal position and new challenges posed by Covid-19 health protocols will undermine the pace of recovery,” the unit said.
This recovery might not even offset SA’s looming fiscal cliff. This is where the country cannot raise enough money to cover its expenses.
Citadel chief economist and advisory partner Maarten Ackerman, for instance, points out that the lockdown hurt its fiscal position. “Given the fact that most public service workers received salaries during the lockdown, and that government expenses have continued to rise even as revenue has fallen, it was inevitable that government would need to seek additional funding.”
Ackerman adds: “And although we received a loan from the International Monetary Fund, government is now looking to borrow even more just to cover the gap for this short period of time.”