New vehicle sales in South Africa declined the most on record, plunging 98.4 percent in April after falling 29.7 and the previous month. Photo: Ben Margot/AP
New vehicle sales in South Africa declined the most on record, plunging 98.4 percent in April after falling 29.7 and the previous month. Photo: Ben Margot/AP

Economy stifled by Covid-19, lockdown increases risk of business failure

By Siphelele Dludla Time of article published May 13, 2020

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JOHANNESBURG – Africa’s large manufacturing companies underutilised their production capacity slightly in February, underscoring weak demand conditions that were starting to cripple economic activity due to the impact of the coronavirus (Covid-19).

Statistics South Africa (Stats SA) said on Tuesday that manufacturing utilisation fell by 1.5 percentage points to 79.3 percent in February from 80.8 percent during the similar period last year.

February 2020 saw South Africa’s sovereign credit rating downgraded to sub-investment status and the economy entering a technical recession a few days into March.

Investec’s Annabel Bishop said that due to stifled economic activity on the Covid-19, economic lockdown was increasingly seeing the risk of business failures rise sharply.

Bishop said the extreme lockdown implemented at the end of March would drive a deep and severe recession in South Africa.

Investec now estimates that the gross domestic product (GDP) would be well in excess of around the -5 percent it estimated in April.

“GDP contraction of above 10 percent year-on-year for 2020 is instead now quite possible on a lengthy, severe lockdown, as many corporates not only temporarily cease activity, but do so permanently,” she said. 

“This would clearly also suppress the anticipated recovery in the economy in the third quarter of 2020 due to these corporate failures."

Investec had originally estimated that the contraction in GDP would be -37.1 percent quarter-on-quarter between March and June this year.

"However, this looks now more likely to be closer to -65 percent quarter-on-quarter in the second quarter, if not worse, without a quicker opening up as the economy is only at level 4 lockdown and we are approaching the halfway mark of the second quarter," Bishop said.

The Covid-19 pandemic has severed global supply chains, leaving the economy heavily exposed to a downturn in economic growth.

StatsSA said nine of the 10 manufacturing divisions showed decreases in utilisation of production capacity in February from the comparative period.

The agency's survey covers large manufacturing enterprises with turnover greater than R100 million per annum and conducts activities in the manufacturing, processing, making or packing of products.

The largest decreases were recorded in the basic iron and steel, rubber and plastic products, wood products, and textiles among others.

Petroleum and chemical manufacturers recorded the highest utilisation of production capacity rate of over 82 percent.

The weakness in the manufacturing industry was also pronounced in the Absa Purchasing Managers’ Index which crashed to all-time low in April as economic activity came to a halt due to lockdown.

New vehicle sales in South Africa declined the most on record, plunging 98.4 percent in April after falling 29.7 and the previous month.

The business confidence index also fell to its lowest level ever since its inception in 1985.

BUSINESS REPORT

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