South Africa GDP Drop Makes Recession The Longest Since 1992

 South Africa GDP Drop Makes Recession The Longest Since 1992

By 

Prinesha Naidoo

September 8, 2020, 5:34 AM EDTUpdated on September 8, 2020, 11:11 AM EDT

• GDP shrank annualized 51% in second quarter from first quarter

• Agriculture the only industry that expanded in period to June

 

A pedestrian wearing a protective face mask crosses a street in Cape Town.

 Photographer: Dwayne Senior/Bloomberg

Sign up to our Next Africa newsletter and follow Bloomberg Africa on Twitter

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

GDP shrank an annualized 51% in the period through June from the previous quarter, following a revised 1.8% contraction in the first three months, Statistics South Africa said Tuesday in the capital, Pretoria. That’s the steepest decline since at least 1990 and extended the recession into a fourth quarter.

 

A strict nationwide lockdown from March 27 deepened the slump in an economy that’s 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.

The median estimate of 17 economists in a Bloomberg survey was for a 47.2% drop in output from the previous quarter. Year-on-year, the economy contracted 17.1%, while on a non-annualized basis, the quarter-on-quarter decline was 16.4%.

MPC Decision

Output shrank more than the central bank’s estimate of a 40.1% annualized 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 Ltd. 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 will weigh on revenue collection and the government’s efforts to stabilize debt and narrow the budget deficit. It will also make it more difficult to lower the unemployment rate of 30.1% that’s seen as a key hurdle to reducing poverty in one of the world’s most unequal nations.

 

While the Reserve Bank forecasts a rebound with annualized growth of 17.5% 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, she said.

The government will use the crisis to “build a new economy” and a recovery strategy that includes plans to fast-track reforms, boost infrastructure investments and promote localization will soon be unveiled, President Cyril Ramaphosa said. “We cannot continue with business as usual.”

Read more: South Africa to Unveil Economic Recovery Plan ‘Soon’: Ramaphosa

What Bloomberg’s Economist Says

“The South African economy was already on the back-foot when the coronavirus struck. The second-quarter GDP data confirmed the economy was badly hit by the measures taken to curb the spread of the coronavirus. While some recovery is currently underway, it is being hampered by a number of long-standing structural constraints — most of which have intensified as a result of the pandemic.”

--Boingotlo Gasealahwe, Africa economist. Click here to read the primer.