EASED LOCKDOWN REGULATIONS LEAD TO PSEUDO ECONOMIC GROWTH SPURT IN 2020Q3
After registering four consecutive contractions, the South African economy registered a 66.1% quarter-on-quarter (q/q) annualised increase in economic activity for the third quarter of 2020 (Q3:020). Meanwhile, activity contracted by -6% (year-on-year, unadjusted) and -7.9% between the first three quarters of 2020 and the first three quarters of 2019. The growth spurt has largely been credited to eased lockdown regulations during the quarter, which aided a significant rebound in manufacturing and mining production activity
The domestic economy recorded a broad-based improvement with the largest growth recorded in the primary industries (172.9%), followed by secondary (155.6%) and tertiary (37.6%) industries. The high spread between tertiary industries and other industries was expected because much of the industry’s core activities where still unrestricted during the hard lockdown, supported by employees working remotely. As such, the easing of lockdown regulations allowed for a moderated spike in activity, most likely from businesses that had halted production during the hard lockdown.
MINING AND MANUFACTURING ACTIVITY STEAL THE SHOW
In line with expectations, manufacturing and mining activity stole the show, increasing by 210.2% and 288.3% respectively during the quarter. The uptick in mining and manufacturing activity was chiefly spurred by the rally in base and industrial metals caused by an upturn in global manufacturing activity and the rise in the demand for gold as a second wave of the virus loomed. In addition, the fulfilment of delayed orders pent-up demand by manufacturers also contributed to the surge. Despite the upturn in manufacturing activity and sentiment, the outlook for the sector remains precarious. The latest ABSA Purchasing Managers Index (PMI) indicates that the sector’s upsurge is likely to wind down in the last quarter of 2020 — once manufacturing backlogs are cleared. PMI decelerated from 60.9 to 52.6 index-points between October and November 2020 owing chiefly to a drop in the new sales order sub-index to below the 50-midpoint at 49 index-points.
INCREASED ECONOMIC ACTIVITY SPURS ELECTRICITY DEMAND Correspondingly, increases in mining and manufacturing production was likely fundamental to the 58% expansion in utilities. During the hard lockdown utilities were mainly consumed at household level, whilst commercial demand was muted due to limited or no economic activity in the production.
GROWTH IN CONSTRUCTION ACTIVITY | A FIRST IN 8 QUARTERS
Construction activity increased by 71.1% in the third quarter of 2020, following- eight (2 years’ worth) uninterrupted contractions. The sudden surge was credited to increased activity in residential buildings, non-residential buildings and construction works which was also attributed to the 5 index-point rise in the FNB/BER Building Confidence to 29 index-points for the fourth quarter of 2020. Owing to the performance of the sector prior to the third quarter of 2020, estimations predict that the surge is unlikely to be sustained. The latest reading is a pseudo increase incited by statistical bias. Going forward, activity is expected to somewhat recalibrate to below pre-COVID level, due to the large exodus of firms during the hard lockdown, depressed domestic demand and changes in workplace dynamics as the pandemic remains uncertain. Notwithstanding, the anticipated downturn could be cushioned by tabled public infrastructure projects in the medium terms.
WORKING FROM HOME SUBDUES TERTIARY INDUSTRIES GROWTH
Aside from 137% increase in trade activity, sectors in tertiary industries recorded relatively lower growth than primary and secondary industries activity, particularly community services which expanded by only 0.9%. The subdue growth in community services is attributed to slower activity in the sector following the rapid COVID relief-related interventions initiated earlier in the year such as increased employment in provincial governments and tertiary institutions. Likewise, the consequences of the lockdown were also felt in other sectors. For instance, growth in the finance sector was primarily attributed to COVID-related ramifications such retrenchments (which may require pension pay-outs) and increased real estate activity as working remotely became the norm.
BREAKFASTS, DINNERS & LUNCHS OUT OVERTAKE FOOD SPEND DURING ALERT LEVEL 3 AND 4
Akin to the uptick in economic production, Gross Domestic Expenditure (GDE) expanded by 67.6% in the third quarter of 2020. Delving further GDE decreased by -6.4% (y/y) and -8.5% for the year to date. Expenditure growth for the period was ascribed to widespread increases, specifically in the unprecedented 201.4% in exports which overwhelmingly dwarfed the -1.6% decline in imports that led to protracted trade surpluses since the lockdown began.
In the same tune, household expenditure was up 69.5% underpinned by surprisingly strong restaurants and hotel figures (7 042.5%) and alcohol beverages, tobacco and narcotics (673.4%) which were 178,7 and 17 times higher than the growth in food and non-alcohol beverage spent. Furthermore, expenditure on recreation and cultural activities grew by 410.3% likely due to the allowance of intra-provincial travel during the Heritage Day long weekend which also marked the end of alert level 3. Looking ahead, expenditure on travel and leisure activities is envisioned to continue increasing because of the upcoming festive season and allowance of international tourists.
Notwithstanding the extraordinary growth recorded for the quarter, the economic outlook for the country remains grim. Analyst indicate that year-to-date and year-on-year figures are a true reflection of the state of the economy and that the current tally is merely a confidence rather than an economic recovery as lockdown regulation eased. A closer look reveals sentiments continue to be reserved with FNB/BER Business Confidence Index continually increasing but below the 50-point midpoint and Consumer Confidence moderately recuperating to -23 index-points (but remaining in the red) for the third quarter of 2020. Given these observations, it is estimated that the current growth will not continue in the near term but will follow a J-shaped confidence-based and then a U-shaped economic-based repossession in the medium term.
