The economic toll of the pandemic and lockdowns is now chillingly apparent.
Statistics South Africa (Stats SA) said on Tuesday that gross domestic product (GDP) shrank 51% during the second quarter, or Q2, on an annualised basis compared to the previous quarter. Market expectations were closer to 47%, so the data is a disappointment. A kinder, gentler read was a 17.1% contraction compared to a year earlier, but the focus will be on the big number.
And talk of a “recession” – this was the fourth straight quarter of economic decline – hardly captures the scale of the catastrophe. This is a depression-level event and one that is steroid-charged.
“The GDP data is shocking. Although it is likely the weakest point of the year for the South African economy, growth forecasts may be subject to further downward revision,” Razia Khan, chief Africa economist for Standard Chartered Bank, told Business Maverick.
So the size of the contraction for all of 2020 that economists, Treasury and others forecast – currently in a range of around 7 to 11% – will likely be widened. And if the economy, as measured by GDP, is smaller at the end of 2020 than current expectations, then the expected debt-GDP-ratio will be even worse, which will further raise the cost of borrowing. It will also mean less revenue will flow to the Treasury, raising its borrowing requirements.
Across the board, the data is simply an unremitting saga of woe.
Output in the manufacturing sector plunged 75%, mining and quarrying 73%, the finance, real estate and business services industry by 29%. Agriculture, one of the bedrocks of the “old” South African economy, was the only sector to experience growth, with a 15% surge. The weather at least has been kind.
And on some fronts, the data may be misleading. The mining industry had a massive decline in production, but precious metals producers currently are raking in huge profits because of prices and they’re paying out hefty dividends.
Still, the overall numbers are clearly awful and point to a dreadful swelling of the ranks of the unemployed. In Q1, the unemployment rate was around 30%. The Q2 number due for release later during September 2020 will certainly be a shocker. Poverty, inequality and hunger are all clearly on the rise.
The data also comes ahead of the next meeting of the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB), scheduled for 15 to 17 September. The central bank has already slashed rates by 300 basis points so far during 2020 and has the ammunition at hand to cut more.
“As it is old data, arguably the Q2 GDP should make little difference to the SARB. That said, our view is for a 25 basis point cut in September, possibly the last in the current cycle. With an economic contraction of 51% q/q confirmed, it is difficult to see the SARB remaining on hold,” said Khan. DM/BM