It will take years to get South Africa’s economy back to pre-Covid levels: economists

South Africa’s economy is unlikely to recover to pre-Covid-19 levels until the 2023/24 financial year, say economists from Momentum Investments.

Stats SA published the latest gross domestic product (GDP) data for South Africa for the second quarter of the year, showing how the country’s economy tanked by more than half from the previous quarter, deepening its recessionary status.

The steep decline was as a direct result of stunted trade and production brought about by the Covid-19 pandemic and nationwide lockdown, exacerbating issues in the already stunted economy.

Real GDP declined by more than expected by 51% in quarter-on-quarter seasonally-adjusted and annualised terms in the second quarter of 2020 and was 17.1% weaker on a year-on-year basis.

According to the production stack up of GDP growth, the largest detractors to activity included the manufacturing and trade sectors which shaved off 10.8% and 10.5%, respectively from the quarterly, annualised growth figure. The agricultural sector was the only GDP division which contributed positively to growth.

A steep fall in construction work activity and machinery and equipment contributed to a collapse in fixed investment, while businesses continued to run down inventory levels in response to fragile demand.

Sanisha Packirisamy, economist at Momentum Investments, said that the GDP data ended up being largely in line with the financial services firm’s projections – however, it surprised on the downside given the wider projection of around -45%.

GDP has declined for four consecutive quarters since the third quarter of 2019. However, with a resumption in economic activity, in line with an easing of the lockdown restrictions imposed by government, expectations are for a ‘bounce’ in growth in the third quarter of the year.

However, soft sentiment indicators and electricity supply constraints are likely to curb the sustainability of the recovery, Packirisamy said.

The median growth expectation of the August 2020 Reuters Econometer is pitched at +18.6% for the third quarter of the year, and is anticipated to decline to +6.1% in the final quarter of the year.

For the full year GDP figure, Packirisamy said she expects growth to contract by 8.1% this year. While other economists see some rebound growth of around 3% in 2021, Packirisamy expects this to be lower at around 2%.

The economist sees economic recovery to pre-Covid levels taking much longer than anticipated due to the extended fallout from lockdown, as well as persistent problems at Eskom.

“We remain cautious of a higher number of business closures and persistently higher level of unemployment detracting from the upturn in growth envisaged next year. Moreover, the increased incidence of load shedding poses a risk to economic activity.

“In our view, the level of economic activity is only likely to return to pre-Covid-19 levels by 2023/24. This negative output gap will likely keep a lid on inflation in the near-term,” she said.

Reza Hendrickse, Portfolio Manager at PPS Investments took a similar view, noting that the impact of the country’s ‘hard’ lockdown has been severe. With the economy gradually having started up in the third quarter, a short term rebound in domestic growth is anticipated.

“Unfortunately, longer term growth prospects, which had been weak prior to Covid-19, have been further impaired,” he said.

“Businesses have taken enormous strain this year, and many will not survive, while consumer spend will be affected by an expected rise in unemployment. Conditions have also been further exacerbated by the resumption of load shedding, which places additional burden on productive capacity.”

National Treasury and the International Monetary Fund currently expect 2020 GDP growth of between -7% and -8%, “but in order to meet these, we will need to start seeing evidence of green shoots developing, as well as a positive interim growth surprise,” Hendrickse said.

“As we reopen these parts of the economy, this means that we may see the V-shaped recovery analysts have spoken of in other countries in the third and fourth quarters,” said Citadel chief economist, Maarten Ackerman. “This will then pave the way for a slow upturn in 2021.”

Rand 

The rand reacted sharply to the GDP data, weakening significantly  against the greenback, having traded in a narrow range in recent sessions.

“After starting the day already slightly weaker, the rand came under further pressure this afternoon following the announcement that GDP had plummeted by 51% quarter-on-quarter,” said Bianca Botes, executive director at Peregrine Treasury Solutions.

Botes said that South Africa has already been in a recession after facing three consecutive quarters of economic contraction, and the latest data implies that the country has now seen a full year of economic decline.

“For South Africa, the extent to which this economic contraction will impact on both fiscal and monetary policy and how we will be able to navigate the road ahead will be crucial, given the current dire fiscal position that government faces,” she said.

By 15h00 on Tuesday the rand traded more than a percent weaker against the dollar.

  • Dollar/Rand: R16.94  (1.16%)
    Pound/Rand: R22.08  (0.15%)
    Euro/Rand: R19.98 (1.00%)

Read: South Africa’s GDP tanks 51% in the second quarter

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It will take years to get South Africa’s economy back to pre-Covid levels: economists