LOCKDOWN | Economic Contraction Domino
SA GDP CONTRACTS BY 51% IN 2020Q2
Last week, forecasters predicted that second quarter growth figures will range between -40% and -54% chiefly attributable to hard lockdown levels 5 and 4 implications to economic activity. Improvements in economic activity are expected to stem from sector deemed to produce essential goods and services during the period, meanwhile excavated losses will be registered among sectors that are highly reliant on foot traffic (such as retail and tourism), global value chains (for supplies) and subsectors that became dormant due lockdown regulations.
Aligned with forecasts, South African economic activity contracted by -51% (q/q) in the second quarter of 2020, elongating the downturn that began in the third quarter of 2019. The latest tally marks the fourth consecutive quarter decline, following declines of -1.8% (2020Q1), -1.4% (2019Q4), -0.8% (2019Q3) and the deepest contraction since 1993–4 recessionary period. Delving further, Gross Domestic Product (GDP), decreased by -17.1% compared to the same time last year and by -8.7% for the year-to-date.
The lacklustre performance was attributed to higher lockdown alert levels that were in effect during the quarter which lead to broad-based contractions in primary (-59.1%), secondary (-72%), and tertiary (-40%) production volumes. Contractions were observed in all sectors except agriculture.
AGRICULTURE | THE ONLY LOCKDOWN GREENSHOT
Agricultural production increased by 15.1%, after recording a 27.1% rebound in the first quarter of 2020. The uptick in activity was foreseen, however, below estimates that ranged between 20% and 25%. Bumper maize and citrus yields, improved terms of trade, and the sector’s essential goods and services status spurred growth.
Going forward, animal products are set to rebound in the third quarter owing to increase activity from core-consumers such as restaurants and the ease of lockdown regulations alert level 2 on 18 August 2020. For the year (2020), AgBiz expects activity to rebound from the -6.9% registered for 2019 to 10% in 2020. The Bureau of Food and Agricultural Policy (BFAP) expects growth in the sector to be higher at 13%. The upbeat outlook is credited to higher food prices because of value chains disruption in international markets during the global lockdown. However, annualized estimates can be curtailed by lower production in wine and tobacco due to behavioural changes in the consumer base. The consumer-base is expected to shrink due to pandemic-related job bloodbath. Notwithstanding the positive agriculture outlook, the rally in activity (which accounts for only 4% of GDP) will not dwarf sluggish activity in other sectors.
INANCE RALLY DAMPENED
Finance activity contracted for the first time since the 2008/9 financial crisis by -28.9%. The sector is second largest contributor to GDP at 21%. The dip was ascribed lower activity in financial intermediation, insurance and pension funding, auxiliary activities, and other business services likely for the redeeming of pensions funds and insurance claims by laid-off clients. Given the disjuncture of finance activity from the real economy, the sector’s outlook remains unforeseeable.
DEPRESSED DOMESTIC DEMAND LINGERS
With lower economic activity, the domino effect continues and plagues the demand (expenditure) side of the economy. Gross Domestic Expenditure (GDE) decreased by -52.3% (q/q), -17.6% (y/y), and -9.2% for the year-to-date. Understandably the reading stemmed from depressions in exports (-72.9%), Gross Fixed Capital Formation (-59.9%), imports (-54.2%), household (-49.8%), and government (-0.9%).
GROSS FIXED CAPITAL FORMATION FIGURES ILLUMINATES DOWNTURN EXTENT
The adverse effects of the national value chain disruptions during the period are corroborated by the slump in Gross Fixed Capital Formation (GFCF). GFCF contracted further to -59,9% (q/q) in the second quarter of 2020, following a tally of -18.6% in the previous quarter. The deeper slum is ascribed to drops in construction works, machinery and other equipment, residential buildings, transport equipment and non-residential building investments critical to activity for manufacturing, construction, mining, and transport activity. Construction activity is expected to bear the brunt of sluggish GFCF figures, given protracted production declines since the third quarter of 2018. The outlook for the construction sector for the last half of 2020 remains grim. This signalled by all-time-low sentiment in both the FNB/BER Building and Civil Confidence Indices of 4 and 5 index-points, respectively, the construction is unlikely to rebound in the second half of 2020. Order books are expected to remain slim, especially for commercial property, as behavioural changes in the “way of doing business” advocates for the remote working.
BEWARE THE SENTIMENT REBOUND EUPHORIA
Due to further easing of lockdown regulations during the third quarter of 2020, sentiments indices have somewhat improved. The Consumer Confidence Index (CCI) registered a recovering reading of -23 index-points for the third quarter of 2020, after sitting at -33 index points for the second quarter of 2020. Meanwhile, the ABSA/BER PMI increased for the fourth consecutive month to 57.3 index points in August 2020, placing well above pre-COVID levels. Conventionally, the uptick in these indices signal recovery in the near term, however, are likely spurred by euphoria among respondents that are still active and does not consider the sentiments of respondents who were once interviewed (before COVID-19) but have since left the respondent database.
GRIM Q2 FIGURES SIGNAL FOR FURTHER RATE CUT
Going forward economic activity is expected to follow a J-shaped recovery; registering growth in the third quarter of 2020 owing to eased lockdown regulations than remain below pre-COVID 19 levels. Scenarios postulate that the South African economy will only recalibrate to pre-COVID in 2024. Analysts speculate that the grim figures for the quarter are likely to incite a further rate cut at the next Monetary Policy Committee (MPC) decision scheduled for 17 September 2020.
