Economy remains at risk of sharp contraction because of civil unrest
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THE economy remains at risk of a sharp contraction this year on the loss of activity as the recent civil unrest could undo the turning points in business cycles that ticked up in May.
The SA Reserve Bank (SARB) said yesterday that the composite leading business cycle indicator rose by 2.3 percent in May, easing from April’s eight-month high of 3.7 percent.
The easing of the leading indicator in May was mainly on fears of another stricter lockdown due to the third wave of Covid-19 infections driven by the Delta variant.
However, the SARB said the increases in seven of the 10 available component time series of the indicator outweighed decreases in the remaining three.
The largest contributors to the print were increases in the average hours worked per factory worker and the volume of orders in manufacturing as supply chains reopened.
The largest detractors were decelerations in the percentage change over 12 months in the indicator for South Africa’s main trading-partner countries.
SARB said that the growth rate of new passenger vehicles sold over the six-months period also smoothed in May.
Economists have indicated that South Africa’s gross domestic product (GDP) will be affected by the violent looting of shopping malls and factories in KwaZulu-Natal and Gauteng last week.
Investec chief economist Annabel Bishop said the extreme damage to infrastructure in a number of areas had negative implications for the upcoming economic quarters.
Bishop said the economy was now likely to only see an expansion of 3.9 percent this year due to the sharp inventory rundowns and loss of productive capacity to rebuild inventories.
“Businesses will suffer from a much greater degree of uncertainty, loss of profitability in the affected areas, and as a result of this, business confidence will fall materially,” Bishop said.
“Government needs to urgently quicken reform and eradicate over a third of red tape and stifling regulations, and give support to businesses affected by the insurgency to support the economy.”
Meanwhile, the composite coincident business cycle indicator eased slightly by 0.2 percent in April after having trended essentially sideways since the closing months of 2020.
The composite lagging business cycle indicator fell by 0.3 percent in April, with its level approximating that in the first month of the year following a steep decline in the indicator after the Covid-related hard lockdown in the second quarter of 2020.
Old Mutual Wealth investment strategist Izak Odendaal said the combination of level 4 lockdowns and the looting meant July was likely to see steep declines in economic activity.
Odendaal concurred that the third quarter as a whole could see negative GDP growth.
“The biggest impact will be on the retail sector, followed by transport and logistics, and manufacturing,” Odendaal said.