SA Economic Recession Deepens…
South Africa’s economic activity contracted by -2.0% quarter-on-quarter (q/q) in the first quarter of 2020, slipping deeper into the technical recession registered in the last half of 2019. The latest tally marks the third consecutive quarterly decline, following economic declines of -1.4% (2019Q4) and -0.8 (2019Q3), and is the sixth quarterly contraction in 2 years.
The sluggish performance was attributed to broad-based declines in primary (-11.8%) and secondary (-7.5%) sector production volumes owing to unprecedented Stage-6 load shedding during the first quarter of 2020 coupled with slowing global economic activity due to the global outbreak of COVID-19.
AGRICULTURAL PRODUCTION CUSHIONS ECONOMIC BLOW
Despite the overall contraction in primary activity, agricultural production rebounded from a contraction of -7.6% in 2019Q4 to 27.8% in the first quarter of 2020. The improvement in activity was credited to increases in field crops, horticulture and animal products supported by bumper harvests in some summer fruit and record-breaking citrus yields. Meanwhile, mining production weighed primary activity down by -21.5% due to sizable contractions in iron ore, manganese ore, other metallic mineral and chromium volumes.
SA 2020 GROWTH FORECAST | PIVOTAL ROLE OF AGRICULTURAL PRODUCTION
Agricultural economic activity is expected to be pivotal in supporting the country’s growth prospects in the months ahead given the sector’s “essential good” status. Apart from the production of wine, floriculture, wool, and cotton, much of the sector remained operational during the lockdown alert level 5. The proceeds from these activities are likely to soften contractions in other sectors, however, may be curtailed by weaker prices in major food staples such as maize. The Agbiz/IDC Agribusiness Confidence Index (ACI) turnover sub-index slipped to 29 index-points in the second quarter, primarily due to tradable grain quality challenges. Notwithstanding, the sector has proven a worthy growth rebound catalyst in the last half of 2018.
STAGE-6 LOADSHEDDING STIFLES MANUFACTURING OUTPUT
The slump in secondary economic activity was chiefly fuelled by protracted bouts of irregular electricity supply and slowing global economic activity and demand due to COVID-19. Consequently, utilities and manufacturing activity contracted for the third successive quarter to register at -5.6% and -8.5%, respectively. Manufacturing activity was weaker, from -1.8% (2019Q4) to -8.5% (2020Q1)due to sluggish figures for petroleum and chemicals, metal products and machinery, and automotive products.
Looking ahead, manufacturing production volumes are expected to remain low, particularly in the automotive sector, partially due to global supply chain disruptions as well as weaker investment levels. The subdued growth prospects for the sector are also evidenced by the broad-based decline in Gross Fixed Capital Formation (investment), which declined by -20.5% in the first quarter of 2020. The expected contraction in manufacturing activity coupled with the downturn in commodity (mining) activity is likely to weaken the economic growth estimate base for the year.
Likewise, the downward trend in domestic construction activity continued into 2020. Construction activity declined by -4.9% in the first quarter of 2020, the sector’s 7th (seventh) quarterly contraction since 2018. This highlights the ongoing challenges facing the sector in the wake of slower public and private sector infrastructure investment recent years.
INFRASTRUCTURE DEVELOPMENT | A LIFELINE FOR ALLYING CONSTRUCTION ACTIVITY
However, the downturn in construction activity is expected to improve in the medium-term. The recent announcement of the evaluation of 276 projects (worth R2.3 trillion) at the Sustainable Infrastructure Development Symposium South Africa will offer much need support for the struggling sector.
LOCKDOWN STOCKPILING SPIKES RETAIL TRADE ACTIVITY
Indicative of strained domestic demand due to the technical recession, trade activity slowed by 1.2% in 2020Q1. The only improvement in trade activity was recorded in retail activity, likely due to monetary transmission effects from rate cuts in the last half of 2019. The change in consumer preferences is corroborated by the 0.7% (q/q) increase in Household Final Consumption Expenditure (HFCE) in the first quarter of 2020. The uptick in expenditure is credited to increases nine (9) of the 12 (twelve) subcomponents, particularly in the purchase of essential goods such as food and non-alcoholic beverages which increased by 4.3%. Correspondingly, the uptick in retail activity could be attributed to stockpiling of non-essential items — such as alcoholic beverages, tobacco and narcotics (3.2%) — prior to the commencement of lockdown alert level 5 on 27 March 2020.
TERTIARY ACTIVITY REMAINS ABOVE WATER
Aside for the drop-in trade activity, tertiary economic activity increased by 1.3%. The increase was driven by strong performances in finance (3.7%), community services (1.0%), households (0.5%), and transport (0.5%). The stellar performance of the finance sector was sustained by growth in financial intermediation and other business services.
FINANCIAL MARKETS RESIST COVID-19 SWAY
Since the beginning of the year, the Monetary Policy Committee (MPC) has decreased the repurchase rate (Repo) by over 40% in an attempted to stimulate domestic economic activity. The MPC’s quick response combined with improved global sentiment in the country’s robust COVID-19 responses, has seen South African asset risk prices rise alongside other emerging markets as other central banks followed suit.
Analysts are of view that the collective stance by central banks has led to a disjuncture between financial markets and the real economy, which has been marred by a torrent of COVID-19 disruptions.
Given the location of the JSE and major finance houses, the uptick in finance activity is likely to bode well for Gauteng. The upsurge is expected to somewhat temporarily shield the inevitable downturn in manufacturing and mining activity in the province. Meanwhile, the trickle-down effects of monetary transmissions that began in the last half of 2019 are anticipated to soothe retail figures going forward. Notwithstanding, the financial market rally is anticipated to be short-lived, especially for emerging and frontier markets that are facing refinancing and debt risks, given impending investment rating decisions.
Going forward, growth prospects for the country remain on the downside. The National Treasury estimates that the economy with contract by -7.2% in 2020, rebound to 2.6% in 2021 then moderate to 1.5% by 2022.
POST COVID-19 | RE-INVENTION OF CONVENTIONAL ECONOMICS
The future of conventional economic growth forecasts is unforeseeable in the post COVID-19 global economy. Speculators postulate that conventional sectoral and standard industrial classification codes (sic) are likely to amalgamate into a single omni-sector, enabled by ICT and BPO services, in line with the behavioural and consumption changes due to the pandemic. However, the realisation of such an economy in South Africa remains slim due to fragmented digital technology adoption polarised towards the “better-off” and the high low-skilled labour pool of the country. Growth is expected to weaken further in the second quarter as the real economic effects of the lockdown begin to show.
