Contraction shows SA's reforms are a day late and a rand short

The Covid-19 coronavirus pandemic, which has severely curtailed economic activity in South Africa, means the outlook remains gloomy and the National Treasury sees GDP contracting by 7.2% this year. Picture: iStock/ Coffeekai
The Covid-19 coronavirus pandemic, which has severely curtailed economic activity in South Africa, means the outlook remains gloomy and the National Treasury sees GDP contracting by 7.2% this year. Picture: iStock/ Coffeekai
  • South Africa's economy contracted 2% in the first quarter of 2020, Statistics South Africa reported on Tuesday morning.
  • The construction industry decreased by 4.7%.
  • The 1.4% fall followed a contraction of 0.8% in the third quarter of 2019.
  • Stats SA said the finance, real estate and business services sectors increased by 3.7% in the first quarter.


Economists have responded to South Africa's gross domestic product figures for the first quarter of 2020, saying the contraction showed that South Africa did not make the shifts to diversify its economy before the Covid-19 pandemic arrived.

South Africa's economy contracted 2% in the first quarter of 2020, Statistics South Africa reported on Tuesday morning. This extends the technical recession that the country found itself in in the last quarter of 2019.

The release of Stats SA's latest quarterly GDP figures comes a week after Minister of Finance Tito Mboweni tabled his supplementary budget in response to the Covid-19 pandemic. Treasury now expects SA's GDP to contract by a record 7.2% in this year, while tax revenues are projected to fall R300 billion short of the what was estimated in February budget.

While load shedding played a significant role in the contraction of the economy in the fourth quarter of 2019, Covid-19 emerged as the likely culprit for extending the economy's contraction into the first quarter of 2020.

The hardest hit industries, according to Stats SA's data, were electricity, gas and water industry, which 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%. Decreases were 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," the Stats SA report said.

Stats SA said the finance, real estate and business services sectors 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, Stats SA said.

Old Mutual investment strategist, Izak Odendaal, said the contraction of the economy was something of an "old news" story as the energy challenges left the South African economy in bad shape in the fourth quarter of 2019 and the Covid-19 pandemic dealt with what was left.

"It wasn't surprising. In fact, it was a bit better than expected. There was a consensus of 4% contraction. This is largely due to contraction in mining and manufacturing, which points to loadshedding. So, it was the old problem coming to haunt us again," said Odendaal.

Odendaal said the second quarter of 2020 would likely reveal the full extent of the lockdown's impact on the economy while data on the third quarter of 2020 would reveal the extent of the economy's recovery, which essentially begins in July.

Odendall said as soon as the South African economy picked up momentum, it could be expected to bump into power constraints as the restarting of the economy will put pressure on the national grid.

Tutwa Consulting senior associate Azwimpheleli Langalanga said the first quarter GDP figures were "definitely not surprising" and that the specific figures "showed South Africans a mirror of the economy".

"I look at these figures with the labour force survey figures recently. Two things are clear. Our economy is still very much dependent on mining, although we have been telling ourselves otherwise. It also shows that we are, to a great degree, a manufacturing economy," Langalanga said.

Langalanga said if South Africa really wanted a sustainable economy, it would have to focus on policy interventions, including beneficiation and shifting away from being an energy reliant, industrial intensive economy.  

"On the positive end, we are also a services-based economy and it is very digitally inclusive, meaning people were able to work in these sectors during the lockdown," said Langalanga.

Investec economist Lara Hodes said going forward, the global crisis caused by the Covid-19 pandemic has thrust world economies into deep recession.

"The domestic economy which was already in a very fragile position before the onset of the pandemic, is thus projected to contract by a marked 10.1% year-on-year this year. South African economy shrank by 1.4% in the fourth quarter of 2019, plunging the country into the second technical recession of the Ramaphosa presidency," Hodes said.

Citadel chief economist and advisory partner, Maarten Ackerman, said the numbers confirmed that South Africa was in a poor financial state even before the global pandemic broke out.

"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," said Ackerman.

The 1.4% fall followed a contraction of 0.8% in the third quarter of 2019, which means that the economy was in recession for the last half of 2019. For the whole of 2019, the South African economy grew by only 0.2% (in real terms). In 2018, it saw growth of 0.8%.

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