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Growth collapse not as bad as feared, but worst still to come

01 July 2020 Momentum Investments
Sanisha Packirisamy, Economist at Momentum Investments

Sanisha Packirisamy, Economist at Momentum Investments

Herman van Papendorp, Head of Investment Research & Asset Allocation at Momentum Investments

Herman van Papendorp, Head of Investment Research & Asset Allocation at Momentum Investments

Highlights

• Real gross domestic product (GDP) declined by less than expected by 2% in quarter-on-quarter seasonally-adjusted and annualised (q/q saar) terms in the first quarter of 2020 and was 0.1% weaker on a year-on-year(y/y) basis. GDP surprised to the upside, given the June 2020 Reuters Econometer median growth expectation of negative 3.8% q/q saar.
• GDP declined for three consecutive quarters since the third quarter of 2019, with all indications pointing to a worsening in economic activity in the second quarter of 2020, as a result of the lockdown restrictions imposed by government in an effort to prepare the country’s health facilities for a rise in COVID-19 infections.
• The agriculture sector staged the largest recovery in the first quarter of the year at 27.8% q/q saar, while an increased incidence of load shedding bit hard into the mining and manufacturing sectors, which contracted by 21.5% and 8.5% q/q saar, respectively.
• Based on the expenditure stack up of GDP growth, fixed investment growth detracted the most from overall economic activity, due to a 45% q/q saar collapse in transport equipment and a contraction of 26.9% in machinery. Businesses continued to run down inventory levels in light of falling demand, which further eroded growth.
• SA’s leading indicator for April 2020 began to reflect the worsening economic climate that spread throughout the second quarter of the year. A further collapse is expected in upcoming months, as reflected by the crash in business sentiment in the second quarter of the year, when lockdown restrictions had the largest negative effect on growth outcomes.
• We expect growth to contract by 8.1% this year and are pencilling in a shallow recovery of 2% in 2021, as an increase in the number of business closures and persistently higher levels of unemployment detract from the expected upturn. In our view, the level of economic activity is only likely to return to pre-COVID-19 levels by 2023/2024. This negative output gap will likely contain inflation in the near term and, as such, we expect further modest monetary policy easing of up to 50 basis points.

Economies at a glance
June 2020

To download the note on the GDP decline in PDF, click here
To download the Economies at a glance report in PDF for June, click here

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