/ 8 September 2020

South Africa’s economy is in a severe recession

Government Eases Lockdown To Re Open Economy
The GDP decline in the first quarter caused a 30.1% decline in the unemployment rate in the first quarter of 2020, which is expected to worsen. (Alet Pretorius/Gallo Images)

South Africa’s gross domestic product (GDP) has fallen for the fourth consecutive quarter, putting the country in a severe recession, Statistics SA announced on Tuesday.

The GDP fell by just over 16.4% between the first quarter and second quarter of 2020, resulting in an annualised growth rate of -51%. 

The plummet has been attributed to the Covid-19 lockdown, which hit the economy the hardest during April, May and June. StatsSA said the second quarter would become known as the “pandemic” quarter.

Data from 1960 showed that the second quarter of 2020 experienced a greater fall in GDP than the annualised decline of 6.1% in the first quarter of 2009 during the global financial crisis and was “far steeper than the annualised 8.2% decline in the fourth quarter of 1982”, according to StatsSA.

Kevin Lings, the chief economist at Stanlib, said the decline is “massive” and “more significant” than economists expected. But, he said, in the context of the unusual circumstances the figure is not entirely out of line with what was expected. 

Maarten Ackerman, Citadel’s chief economist, said that it is not so much about the GDP number, but “the declining trend we have already been seeing over the past few years and the previous three quarters of negative growth”. 

“It’s not Covid-19 that pushed us into recession — we were dealing with a recession before Covid-19 – but the virus is going to make it a much deeper recession, maybe even a depression”.

Lings said the next quarter will see an increase in GDP because most industries have now opened, but, overall, the economy will contract by close to 10% for 2020.

The GDP decline in the first quarter caused a 30.1% decline in the unemployment rate in the first quarter of 2020, and Lings expects it will worsen in the next quarter.

During the lockdown in quarter two, most sectors were closed or operating at limited capacity. The majority of industries experienced a large drop in output except for the agricultural sector, which saw an increase of 15.1%. This was a result of the increase in maize exports and international demand for citrus fruits and pecan nuts. Agriculture’s contribution to the economy is generally about 2.5%.

At 76.6%, construction saw the highest decline in output, the manufacturing sector came second with a contraction of 74.9%, and mining declined by 73.1%.

StatsSa said air travel came to a halt, contributing to a fall of  67.9% in economic activity in the transport and communication industry. The retail ban on alcohol sales and closure of accommodation facilities were notable drags on trade activity, resulting in a decline of 67.6%. Wholesalers and motor vehicle traders also reported significant declines.

The finance industry, which includes banking, insurance services, real estate and business services, fell by 28.9%. Personal services, which includes businesses such as gyms and hairdressers, closed their doors and sporting and recreation events were cancelled, and hospitals halted elective operations, resulting in a decline of 32.5%.

StatsSA also measured the demand side of the economy, which slumped by 52.3% as a result of lower exports and household spending.

Interestingly, communication, housing and education expenditure were up in the second quarter.
Ackerman said that when the economy is dropping 51% quarter-on-quarter annualised, it has a negative effect on revenue collection.

He said the real matter of concern regarding GDP isn’t the actual number but rather the effect it will have on the fiscal health of South Africa for the next few years and how difficult it will be to turn that situation around. “That is the underlying challenge in terms of the number that we saw today,” he said.