Covid-19 lockdown results in largest GDP contraction on record

As expected, the 2Q20 gross domestic product (GDP) contracted by a record 51% on a quarter-on-quarter (q/q) seasonally adjusted and annualised rate (saar), extending SA’s technical recession to four consecutive quarters of negative economic growth. Overall, the deep contraction in output is mainly due to the strict lockdown regulations imposed in order to curb the spread of Covid-19.

Production-side
Due to favourable rainfall resulting in an increase in the production of animal products, field crops and horticulture, agriculture was the only sector to record positive growth, climbing 15.1%. However, the primary sector still contracted as mining plunged 73.1% chiefly as a result of a decline in platinum group metals, gold and iron ore production.

As the majority of the manufacturing sector was not deemed an essential service under level 5 and 4 lockdown regulations, the sector contracted by 74.9% with all ten divisions declining over the period. Similarly, all three construction subcomponents plunged, resulting in the sector falling by 76.6%. Unsurprisingly, an abrupt halt in general economic activity led to the utilities sector declining by 36.4%.

As there were marked downturns in activity for wholesale, retail and vehicle trade, as well as catering and accommodation, the trade sector fell by 67.6%. Likewise, the transport sector declined by 67.9% due to less land and air transport activities as a result of the work-from-home drive, as well as restrictions on both international and inter-provincial travel and tourism activities. Finance, real estate and business services contracted by 28.9% due to a slump in insurance and pension funding, financial intermediation and other business services. The government sector registered a slight decline of 0.6% due employee attrition. Despite the increased need for health services, personal services were down 32.5% as spas, gyms and barbers remained closed.

Expenditure-side
Household consumption expenditure (HCE) declined by 49.8% in 2Q20 and was the largest detractor of growth from the expenditure-side approach to GDP. This shaved 30.8 percentage points off the headline number. Within HCE, a downturn in expenditure on semi-durable (e.g. clothing) and durable goods (e.g. vehicles) were among the main reasons for slump in expenditure by households. This can be directly linked to lockdown restrictions exacerbating already weak labour market conditions. Interestingly, the “work from home movement” resulted in an increase in spending on education, communication and utilities.

Government consumption was down 0.9%, not only due to a decline in employment (as mentioned previously), but also due to a reduction in spending on goods and services despite increased expenditure on personal protective equipment.

As a result of disruptions in global supply chains, imports of machinery and equipment were particularly weak. This factor combined with an exceptional decline in construction works, resulted in gross fixed capital formation plunging by 59.9%. Unsurprisingly, there was a drawdown in inventories particularly in mining and manufacturing production as well as trade, totalling R74 billion in 2Q20.

From an international trade perspective, net exports (i.e. exports less imports) detracted from the headline number as the decline in exports (-72.9%) outweighed that of imports (-54.2%). The decline in both exports and imports can be attributed to a notable downturn in domestic sales and foreign purchases of vehicles, equipment, mineral products and services amid stringent lockdown measures in 2Q20.

We anticipate more upbeat growth prospects in the second half of the year due to the gradual easing of restrictions on economic activity as well as a low base in 2Q20. Overall, we still affirm our view that economic growth will decline by 8% year-on-year in 2020. While we are encouraged by the infrastructure drive as part of the broader post-Covid-19 economic recovery plan, this remains an upside risk to our longer-term growth outlook.  

Click here for the 2Q20 GDP Infographic...