South Africa’s -2% reduction in GDP growth for Q1 2020 may have been above market expectations, but it almost means nothing given the impact of the coronavirus pandemic, says Maarten Ackerman, chief economist and advisory partner at Citadel.
In a research note on Tuesday (30 June) Ackerman said that this performance only accounts for economic performance to the end of March, so it includes less than five working days of the lockdown.
“The worst, by far, is yet to come from one of the globe’s harshest lockdowns,” he said. “And this grim result follows on from the recessionary environment that we were already stuck in with -1.4% in Q4 2019, which itself followed -0.8% in Q3 2019.
“I have previously warned that we could potentially even see a depression as a result of the additional impacts of the Covid-19 crisis weighing on an economy that was already stuck in recession before the crisis started.”
The cost of the ban
On the expenditure side, government final consumption expenditure (GFCE) was the largest contributor to growth, rising by 1.1%, followed by household final consumption expenditure (HFCE) which rose by 0.7%.
For a consumer-based economy, the 0.7% growth was disappointing, said Ackerman.
He noted that the largest contribution of this came from food and non-alcoholic beverages, while the second-largest contributor was alcoholic beverages and tobacco.
“This underlines the significance of the ban on the sales on these items during Levels 4 and 5 of lockdown (and even Level 3 in the case of tobacco products),” he said.
“In the next quarter, this will almost be wiped out because we did not trade in these products for most of the quarter.
“And here we are talking zero growth, zero trade entirely. On top of this, there will be limited sin taxes that government collects from the sale of these products, which will severely constrict state revenue further.”
Ackerman noted that there were also certain negative contributors to HFCE: clothing and footwear; transport; and restaurants.
Considering that these were showing negative growth already in Q1 before we went into the full lockdown, we can expect to see a massive decline in those sectors in Q2, he said.
The road to a depression
These numbers confirm that we were in a very poor financial state even before the global pandemic broke out, said Ackerman.
He noted that the updated Supplementary Budget delivered last week made it clear that we are facing significant challenges, so these figures almost appear out of date.
“The fact that they were printed today hasn’t really made a significant difference to our situation,” he said.
“Considering the global economic trends currently taking place, the South African Reserve Bank (SARB) and National Treasury’s forecasts that the SA economy will decline anywhere between 7-8% this year are likely in the right ballpark.”
He warned that if doesn’t see radical economic reforms then this recession will develop into a depression, with a significantly long road to recovery.
This will then result in not only severe fiscal challenges for the country, but also a worsening of our many socio-economic challenges on the back of that as well, he said.
Commenting on the GDP data Benedict Mongalo, chief investment officer at independent fund manager Novare Investments, said that the country’s recovery is likely to be protracted.
“In South Africa’s case, even greater vulnerabilities are presented by the weak fiscal position and resulting credit rating downgrades.
“There have been a number of corporates filing for business rescue or initiating retrenchment discussions with labour unions. We therefore hold the view that significant market risks will persist at least for the time being,” he said.
Looking ahead, Mongalo said capital markets will recover just as they have after experiencing similar exogenous shocks over the years.
“However, we hold the view that this recovery is likely to be protracted, and not V-shaped as the market is currently pricing in.
“Despite the recovery in markets, which have rallied since March, Novare Investments sees continued volatility necessitating various risk mitigation strategies, including derivatives to protect the downside.”