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First quarter growth figures suggest a major economic setback when the impact of COVID-19 kicks in

30 June 2020 Novare Investments

South Africa’s gross domestic product (GDP) appears on track to possibly contract by double-digits this year as the coronavirus hastens the decline of an economy that was already in recession before its arrival.

First quarter GDP figures, released by Stats SA today, showed the economy declined by 2.0% in the first three months of this year following a decrease of 1.4% in the fourth quarter of 2019, on a quarter-on-quarter seasonally adjusted and annualised basis.

The mining and quarrying industry decreased by 21.5% and manufacturing contracted by 8.5% in the first quarter of 2020.

Benedict Mongalo, chief investment officer at independent fund manager, Novare Investments, commented: “Today’s GDP figures show that the economy was well into recession before Covid-19 struck. While the figures reflect the impact of load shedding, we’ll have to wait for April’s numbers to get a better idea of the effect of the coronavirus lockdown. Based on the first quarter figures, we should expect the worst.”

He added that the growth figures highlight again the urgent need to implement long-overdue structural reforms to substantially improve the prospects for economic growth. South Africa’s growth rate over the past five years has averaged 0.7% and, in line with worst-case predictions, the IMF also downgraded its outlook for the economy by a further 2.2% (from their April forecast) to -8.0%.

Mangalo noted the disconnect between the dire economic conditions and rising asset prices across emerging markets where currencies, bonds and equities are surprisingly buoyant. According to Bloomberg, emerging market assets are about to end their best quarter in a decade as a wave of central bank stimulus supports risk appetite.

“Despite the recovery in share prices globally and in South Africa following the sharp sell-off in March, it is evident that significant downside risk remains due to muted consumer demand, distressed companies, and consensus of a global recession amidst no clear timeline for a return to normality. The recent sharp rise in case numbers in the southern states in the US confirms this expectation.

“Market risks are also evidenced by necessary and unprecedented fiscal and monetary stimulus interventions domestically and globally,” said Mongalo.

“In South Africa’s case, even greater vulnerabilities are presented by the weak fiscal position and resulting credit rating downgrades. There have been a number of corporates filing for business rescue or initiating retrenchment discussions with labour unions. We therefore hold the view that significant market risks will persist at least for the time being.”

He advised investors who are unsure about how to react to economic and market uncertainty to keep calm and stay focused on their savings objectives.

Looking ahead, Mongalo said capital markets will recover just as they have after experiencing similar exogenous shocks over the years. “However, we hold the view that this recovery is likely to be protracted, and not V-shaped as the market is currently pricing in. Despite the recovery in markets, which have rallied since March, Novare Investments sees continued volatility necessitating various risk mitigation strategies, including derivatives to protect the downside.”

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