South Africa’s recession deepens as first quarter GDP sinks 2%

South Africa recorded a decline in Gross Domestic Product (GDP) in the first quarter of 2020, deepening the recession it entered into at the start of the year.

According to Stats SA, GDP growth for 1Q20 was recorded at -2%, marking the third quarter of decline in succession, following drops of 0.6% in 3Q19, and 1.4% in 4Q19.

Notably, the data reflects only the first three months of 2020, before the nationwide lockdown was fully implemented (27 March).

This means the economic turmoil suffered as a result of South African industries and business sectors being shut down to prevent the spread of Covid-19 is not represented in the latest data.

According to Stats SA, a drop was seen across half of the sectors assessed, with the biggest declines seen in mining and manufacturing.

The mining and quarrying industry decreased by 21.5% and contributed 1.7 percentage points to GDP decline. Decreased production was reported for iron ore, manganese ore, other metallic minerals and chromium.

The manufacturing industry contracted by 8.5% in the first quarter. Seven of the 10 manufacturing divisions reported negative growth rates in the first quarter.

The divisions that made the largest contributions to the decrease were petroleum, chemical products, rubber and plastic products; basic iron and steel, non-ferrous metal products, metal products and machinery; and motor vehicles, parts and accessories and other transport equipment.

The electricity, gas and water industry contracted by 5.6% in the first quarter, largely due to decreases in electricity distributed and water consumption.

The construction industry decreased by 4.7%, with drops reported for residential buildings, non-residential buildings and construction works.

The agriculture, forestry and fishing industry increased by 27.8% and contributed 0.5 of a percentage point to GDP growth. The increase was mainly due to increases in the production of field crops, horticultural products and animal products.

Finance, real estate and business services increased by 3.7% in the first quarter. Increased economic activity was reported for financial intermediation, insurance and pension funding, auxiliary activities, and other business services.

General government services increased by 1.0%, mainly attributed to increased employment in provincial government and higher education institutions.

Biggest decline in 90 years

Banks, economists and government have all warned that South Africa will experience an unprecedented decline in GDP in 2020 as a result of the lockdown, with current projections ranging between a 5% and 10% decline.

Prospects were already bleak prior to lockdown, with the most optimistic scenario pointing to GDP growth of just 1% in 2020.

As evidenced in the emergency budget presented by finance minister Tito Mboweni last week (24 June), South Africa’s fiscal issues are mounting, with the severe loss in production as a result of the lockdown exacerbated by high levels of government spending, and other weak fundamentals, such as ballooning debt, infrastructure deterioration and failing SOEs.

According to the minister, the Covid‐19 crisis has turned the global economy upside down, noting that in the February Budget, it was expected that the global economy would expand by 3.3% in 2020 – now the expectation is that there will be a global contraction of 5.2%.

“This will bring about the broadest collapse in per capita incomes since 1870. Throughout the world, tens of millions of workers have lost their jobs. South African unemployment increased by one percentage point, reaching 30.1 per cent in the first three months of this year,” he said.

“The South African economy is now expected to contract by 7.2% in 2020. This is the largest contraction in nearly 90 years.

Early projections show that gross national debt will be close to R4 trillion, or 81.8% of GDP by the end of this fiscal year. This is compared to an estimate of R3.56 trillion or 65.6% of GDP projected in February, Mboweni said.

Debt-service costs will increase from R204.8 billion in 2019/20 to R236.4 billion in 2020/21, or from 4% of GDP to 4.9% of GDP. Debt-service costs are expected to reach R301.1 billion, or 5.4% of GDP, in 2022/23.

On tax collection, Mboweni expects a shortfall of around R300 billion in 2020, which will push the country’s budget deficit to R761.7 billion or 15.7% of GDP in 2020/21. This is up significantly from all projections made pre-lockdown.

While government has committed to cutting spending, particularly around the public sector wage bill. analysts have noted that National Treasury’s track record of following through with announced cuts has been dismal, giving no real credibility to statements.

This has been echoed by ratings firms such as Moody’s, who have cast doubt on government’s capacity to follow through.


Read: The massive risk tied to Mboweni’s emergency budget

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South Africa’s recession deepens as first quarter GDP sinks 2%