South Africa’s restrictions to curb the spread of the coronavirus put the economy into its longest recession in 28 years, with the GDP contracting more than expected in the second quarter. Photo: File
South Africa’s restrictions to curb the spread of the coronavirus put the economy into its longest recession in 28 years, with the GDP contracting more than expected in the second quarter. Photo: File

SA recession deepens with GDP in steep 51% drop as lockdown restrictions sting

By Bloomberg Time of article published Sep 8, 2020

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JOHANNESBURG – South Africa’s restrictions to curb the spread of the coronavirus put the economy into its longest recession in 28 years, with the gross domestic product (GDP) contracting more than expected in the second quarter.

GDP shrank an annualised 51 percent in the period through June from the previous quarter, compared with a revised 1.8 percent contraction in the first three months, Statistics South Africa (StatsSA) said on Tuesday.

That is the steepest decline since at least 1990 and extended the recession into a fourth quarter, the longest period of consecutive quarterly contractions since 1992.

The median estimate of 17 economists in a Bloomberg survey was for a 47.2 percent drop in output from the previous quarter. Year on year, the economy contracted 17.1 percent, more than the median estimate of 16 percent.

Recession Extended

A strict nationwide lockdown that started on March 27 deepened the slump in an economy that is stuck in its longest downward cycle since at least World War II. Enforced by the police and military, people were allowed to leave their homes only to buy food, collect welfare grants and seek medical care unless they provided essential services. While a gradual re-opening of the economy started on May 1, many companies closed down permanently or fired workers during the shutdown.

MPC Decision

Output shrank more than the central bank’s estimate of a 40.1 percent annualised contraction, increasing the chances of a sixth interest-rate cut this year. Governor Lesetja Kganyago said last month that muted inflation gives the monetary policy committee room to respond if the nature of the shock caused by the pandemic turns out to be worse than forecast.

“It adds to the case to cut by 25 basis points,” said Nazmeera Moola, head of South African investments at asset manager Ninety One in Cape Town. “We expect 25 either now or the following meeting, but I think this data helps to increase the case for a cut next week.”

The continued contraction is likely to weigh on revenue collection and the government’s efforts to stabilise debt and narrow the budget deficit. It will also make it more difficult to lower the unemployment rate of 30.1 percent that is seen as one of the biggest obstacles to reducing poverty in one of the world’s most unequal nations.

While the SA Reserve Bank (SARB) forecast a rebound with annualised growth of 17.5 percent in the third quarter, continued power cuts in what’s already a record year of outages and slow reforms could threaten the recovery.

“The level of economic activity is only likely to return to pre-Covid-19 levels by 2023-24,” said Sanisha Packirisamy, an economist at Momentum Investments. “The difference between actual and potential growth “will likely keep a lid on inflation in the near term.”

Other Key Points:

  • Expenditure on GDP fell an annualised 52.3 percent in the quarter.
  • Household spending dropped by 49.8 percent.
  • Gross fixed capital formation decreased by 59.9 percent.
  • Agriculture was the only industry that expanded, with 15.1 percent growth. Most farming operations continued during the lockdown as essential services.
  • Construction showed the biggest decline, at 76.6 percent, followed by manufacturing at 74.9 percent and mining at 73.1 percent. Most activity in these sectors was halted for the initial part of the lockdown.

BLOOMBERG

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