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SA remains in recessionary territory

01 July 2020 FNB

GDP by production-side

South Africa’s gross domestic product (GDP) remained in recessionary territory, falling by 2% quarter-on-quarter (q/q) at a seasonally adjusted and annualised rate (saar) in 1Q20 after recording contractions of 1.4% and 0.8% in the two preceding quarters respectively.

In the primary sector, agriculture surged 27.8% q/q due to higher production of animal products, horticulture and field crops amid favourable weather conditions. Conversely, mining contracted 21.5% q/q largely due to lower production of iron and manganese ore as well as “other” metallic minerals and chromium.

All secondary sectors recorded negative growth rates over the quarter, led by an 8.5% q/q decline in manufacturing on the back of a notable downturn in fuel and chemical products, iron and steel and metal products, as well as vehicle and transport equipment. Due to a decline in demand from energy-intensive sectors (i.e. mining and manufacturing), it is unsurprising that utilities contracted by 5.6% q/q. Similarly, construction retreated for the seventh consecutive quarter, falling by 4.7% q/q, as a result of a slump in both residential and non-residential buildings as well as construction works.

In the tertiary sector, trade fell by 1.2 q/q as a result of a broad-based decline in wholesale and vehicle trade, as well as catering and accommodation services. It was encouraging to see transport climb 0.5% q/q on the back of higher delivered freight volumes. Similarly, finance, real estate and business services grew by 3.7% q/q led by a rise in insurance and pension funding, financial intermediation and other business services activity. Government services rebounded 1% q/q as an uptick in employment in higher education and provincial government prospectively drove the overall increase during the quarter.

Looking ahead, we expect 2Q20 GDP to register the largest contraction on record. This can be ascribed to lockdown measures adversely affecting economic activity. More stringent regulatory requirements in the leisure and hospitality industry, and temporarily in the extractive sectors of the economy, will almost certainly weigh on the growth outcome.

GDP by expenditure-side

In the first quarter of 2020 household consumption expenditure (HCE) grew by 0.7% q/q. The main contributor to HCE growth was spending on food and non-alcoholic beverages, which grew by 4.3% q/q and contributed 0.8 of a percentage point (ppt). This was followed by furnishings (3.2% q/q and 0.3ppt) and housing and utilities (1.7% q/q and 0.2ppt). Interestingly, clothing and footwear (-8.1% and -0.5ppt) and transport (-3.9% and -0.6ppt) were the largest detractors to HCE spend.

Due to increases in employment and higher expenditure on goods and services, government consumption expenditure (GCE) increased by 1.1% q/q.

As a result of our main trading partners entering their own domestic lockdowns, imports of machinery and equipment, predominantly from China, remained weak. Consequently, gross fixed capital formation (GFCF) decreased by a substantial 20.5% q/q. It is worth noting that there was also a drawdown of R67.3 billion in inventories mainly in the mining, manufacturing and trade sectors.

Net exports (i.e. exports less imports) were a positive contributor to overall expenditure on GDP. This was as a result of exports declining by a softer pace to imports of 2.3% q/q chiefly as a result of a waning export sales of base and precious metals. Imports of goods and services declined by 16.7% q/q due to a notable downturn in machinery and equipment, as well as mineral product purchases.

From a demand-side perspective, we expect HCE to come under immense pressure due to reduced real household income growth and job shedding amid lockdown restrictions. Conversely, GCE should pick up as fiscal expenditure on relief measures, particularly in the health space, rises in order to combat Covid-19. Due to persistently low business and investor confidence levels, GFCF will likely remain lacklustre.

Stats SA noted that due to the lockdown restrictions, the latest GDP numbers have higher imputations due to lower response rates. They also indicated that the benchmarking and rebasing of GDP, previously scheduled for September, will be postponed to a future date yet to be announced.

Click here for FNB GDP sector infographic

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