GDP figures: 5 things you need to know

09 Sep 2020

Annabel Bishop

Investec Chief Economist

Lara Hodes

Economist

The economy contracted by a massive 51% in the second quarter of this year due to the severe effects of the economic lockdown and a collapse in spending and investment.

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Government-imposed lockdown restrictions have wreaked havoc on economies around the world and served to exacerbate the numerous challenges South Africa was already facing before the onset of the pandemic.
These include increased unemployment numbers and a highly constrained fiscus. Consequently, following a three quarter recession, the Q2 2020 GDP reading plunged by a further, unprecedented 51.0% on a quarter on quarter seasonally adjusted annualised (qqsaa) basis.
 
Here are the five things you need to know about the latest GDP figures.
 
 
1.     Lockdown limited household spending. Financial hardship will limit it even more
 
The GDP collapse reflected in data released on Tuesday represents a 17.1% year-on-year decrease. Over 20% of the drop was due to a decline in household spending as restrictions limited purchases. 
 
However, an even bigger and longer-lasting driver is likely to be the substantial loss of income many faced as the Covid-19 crisis hit already financially constrained households.  
 
The manufacturing, trade and transport sectors were among the biggest casualities of the pandemic and together erased 27.9% from the headline GDP outcome. Stringent lockdown measures enforced in April and May prevented a large part of the economy from operating, leading to significant demand- and supply-side shocks. 
 
 
2.     The drop in fixed investment is bad news for employment
 
A sharp drop in fixed investment contributed to 11.5% of the fall, as companies cut back severely on expansion, while a number of firms closed permanently as well.
 
Furthermore, gross fixed capital formation fell by a staggering 59.9% qqsaa, following a marked 18.6% qqsaa slide in Q1.  The lockdown impeded construction plans and severely depressed business confidence continues to hinder private sector fixed investment. 
 
This is more bad news for the economy with the unemployment rate, which climbed to 30.1% in the first quarter of the year, forecast to reach around 37.9% in Q2 (Stats SA data) as many businesses have had to shut their doors permanently or downscale their workforce.

 
However, the full effect of the pandemic on employment numbers will only be established over time as unemployment is a lagging economic indicator.
 
3.     A long and arduous road to recovery lies ahead

 
The low base created by the collapse in GDP in the second quarter will at least provide a statistical boost for the next quarter's economic growth, which is likely to be in the region of 16.3% qqsaa.  High frequency data releases for Q3 thus far point to modest signs of recovery, however the path to pre- covid levels is likely to be protracted and arduous. 
 
 
4.     Secondary and tertiary sectors were hit hardest 
 
It will take several years, possibly until 2025, for SA to return to the level of economic activity experienced at the end of 2019, which was R3.14 trillion in real terms (adjusted for inflation) or R5.2 trillion in nominal terms.
 
A sectoral breakdown of the GDP result reveals that the primary sector of the economy plummeted by 59.1% qqsaa, following Q1's 11.8% qqsaa slide. Specifically, mining and quarrying activity fell by a severe 73.1% qqsaa in Q2, weakening the overall headline GDP reading by a marked 6.0%.
 
A near shut-down of most economies globally saw demand for commodities decline sharply, while supply side constraints continued to weigh on international trade even once restrictions were loosened. 
 
Sharp declines of 74.9% qqsaa, 36.4% qqsaa and 76.6% qqsaa in the manufacturing, electricity, gas and water and construction sectors respectively led to the unparalleled 72% qqsaa plunge in the secondary sector of the economy. Stringent lockdown measures enforced in April and to a lesser degree in May, prevented a large part of the economy from operating leading to significant demand and supply side shocks. 
 
The trade, accommodation and catering sector as well as the transport industry experienced unparalleled declines of 67.6% qqsaa and 67.9% qqsaa respectively, largely underpinning the 40% contraction in the tertiary sector. Indeed, barring those companies selling or involved in the provision of essential goods and services these industries were largely shut down during the initial lockdown period. 
 
 
5.     Electricity constraints and policy uncertainty will slow the economic recovery
 
The pace of recovery will be extremely slow for the South African economy, in particular held back by the major electricity constraints and lack of political will to radically reduce the complexity and number of regulations the industrial sector is constrained by.
 
Persistent policy uncertainty and the slow implementation of crucial reforms continue to weigh on business and consumer confidence, inhibiting growth. 
 
The GDP in 2020 is expected to contract by 10.1% y/y.