Statistics South Africa (StatsSA) reported yesterday (8 September) that the South African economy contracted by 51% quarter on quarter (q-o-q) in the second quarter of 2020 due to the national lockdown.
Lullu Krugel, chief economist for PwC Strategy Africa, and Dr Christie Viljoen, PwC Strategy& economist, examine the numbers.
The q-o-q decline in economic activity was slightly worse than economists had expected.
On a technical note, the q-o-q number refers to a seasonally adjusted and annualised rate (saar). It indicates that, if the same collapse in activity were to continue for a full 12 months, the economy would end this period at around half if its first quarter size.
The actual decline in activity between Q1 and Q2 was likely closer to 14%.
With the exception of agriculture, which expanded by 15,1% q-o-q, all other industries contracted q-o-q.
Sector-specific lockdown restrictions resulted in mining, manufacturing and construction all declining by more than 70% q-o-q on a seasonally adjusted and annualised basis.
Activity in the combined trade, catering and accommodation category dropped by 67,6% q-o-q due to the closure of restaurants, hotels, and non-essential retail for a large part of the April-June period.
Government activity declined by a very small 0.6% q-o-q as most of the reduction in some public sector service delivery was compensated for by an increase in healthcare and other related spending.
The slowdown in economic activity during the second quarter resulted in the South African economy being 17,1% y-o-y smaller, compared to the same period in 2019.
All industries except agriculture and government services were smaller y-o-y due to the lockdown, with mining, manufacturing and construction around a third smaller compared to 2019Q2.
To be fair, these three industries were already in a recession prior to Covid-19, with the lockdown only intensifying the weak operating conditions.
For the first half of the year, Stats SA calculated an average 8,7% y-o-y decline in economic activity.
The expected bounce back in economic activity during the third quarter – under much less severe lockdown restrictions – will be instrumental in getting the South African economy back on its feet.
Available data for July shows a smaller decline in private sector activity during July and August compared to the deep plunge in the second quarter.
This resulted in a smaller y-o-y decline in tax revenues in the early parts of the third quarter, though fiscal finances are still under severe strain. By the start of September, workplace activity was still 28% lower compared to the start of the year.
PwC expects Q3 economic data to be less negative compared to the preceding three-month period and for the economy to contract by an average of 10,4% during the 2020 calendar year.
The South African Reserve Bank (SARB) said in July that it expects the economy to contract by 7,3% this year.
However, the 51% q-o-q contraction in Q2 GDP is more severe than the 32,6% q-o-q decline that the central bank was expecting for the period. As such, it is expected that the SARB Monetary Policy Committee (MPC) will revise its 2020 GDP forecast when the body meets again next week – and forecast a deeper recession for the year.
PwC is of the view that this, combined with still-low inflation readings at the bottom end of the SARB target range, could open the door for additional interest rate cuts in the short term.
Looking ahead, the solution to this economic quagmire is – as it has been for many years – the implementation of key structural reforms to the economy.
Top of this list is finding a solution to the country’s electricity security. PwC estimates that the negative impact of loadshedding in 2020 will completely cancel out the positive impact created by interest rate cuts and payments under the Temporary Employer/Employee Relief Scheme (TERS).