The “lies, damned lies & statistics” pay-line: Why economists say SA’s 51% quarter-on-quarter GDP contraction is no big deal
Jane and Joe Average had an inkling that South Africa’s 2020 Gross Domestic Product (GDP) numbers would be bad; but nothing prepared them for the staggering 51% decline plastered over online news sites and social media platforms from 8 September 2020. “Real GDP, measured by production, decreased by a record 51,0% in the second quarter of 2020,” wrote Statistics South Africa, with the ‘for economists only’ disclaimer: “Growth rates, unless otherwise stated, are quarter-on-quarter, seasonally adjusted and annualised”. Journalists immediately latched onto the 51% number as indicative of a halving of the economy. “Not correct!” scream the economists.
A contrived and meaningless comparison
John Loos, Economist: Commercial Property Finance at FNB observes that the 51% number is so contrived that it has nothing to do with the actual quarterly GDP experience. “This 51% seasonally adjusted, annualised drop is a calculation that takes a quarterly drop and calculates what the rate would be if the quarter-on-quarter rate of change continued over a whole year”. His brief explainer, posted on LinkedIn, went on to dismiss the calculation as meaningless. It would be better, he said, to compare the second quarter of 2020 with the second quarter of 2019, in which case the contraction is a more palatable 17.1%. We kind of agree with Loos; but then again, the phrase “damned if you consider the quarter-on-quarter annualised number; dammed if you do not” springs to mind.
The debate swiftly spins into one of semantics in which one economist attempts to out-logic another as to exactly how dire the economic contraction is. Theuns Pelser, Strategy Professor at the University of KwaZulu-Natal, also on LinkedIn, was also quick to defend the country’s faltering economic performance. “Yes, South Africa had one of the worst GDP outcomes under lockdown; but [the 51% contraction] does not mean the economic output halved,” he postured. The writer accepts both Loos’ and Pelser’s observations; but reminds them that the publication of statistics on a consistent basis is done to allow for comparison and, in the annualised world, to analyse trends.
The consistent calculation of real GDP growth for the second quarter 2020, made it possible for the South African Reserve Bank (SARB) to publish a meaningful ranking of country performances through lockdown, with only a handful of economies suffering worse than ours. There is some consolation in the fact UK, India, Mexico, Malaysia, Peru and Spain managed to outperform (sic) us on the GDP downside. Setting aside the ‘annualised or not’ debate we can agree that the economy, which was already faltering at the end of 2019, is now properly on the rocks. Attention will now turn to government’s plans to dig us out of the hole we are in.
Keeping an eye on monetary policy responses
Cannon Asset Managers was quick with comment following the 8 September statistical release. They noted that the upcoming Monetary Policy Committee (MPC) rate decision would be closely watched, with interest even, as would the Medium Term Budget Policy Statement due in October. What we liked about their media release was that they focused on what the numbers meant, rather than quibbling over the basis for measurement and comparison. “South Africa’s economy has grown in only three of the 10 quarters that Cyril Ramaphosa has been president, highlighting its structural weakness,” they write. They make the critical observation that while COVID-19 may have been the catalyst for second quarter economic collapse, it is not entirely to blame.
Dr Adrian Saville, Chief Executive at Cannon Asset Managers expressed his disappointment at both the application and measurement of the R500 billion lockdown stimulus ‘claimed’ by government. “While government announced a R500 billion stimulus package during the second quarter of 2020 … some of the programmes making up the package have been caught up in delays, technical difficulties and widespread allegations of corruption,” he wrote. Other issues include the double-counting of reprioritised expenditures, which involved amounts that were already earmarked for projects being repurposed for pandemic relief, as well as counting the deferment of tax obligations as relief funding.
Government is aware of most of the constraints on economic performance mentioned by Dr Saville, which include “electricity supply challenges; persistent policy uncertainty surrounding [critical issues such as] the South African Reserve Bank (SARB) and land ownership; and the slow implementation of reforms which hold back investor confidence and choke growth prospects”. The impact of pandemic combined with countless ‘understood but never addressed’ economic constraints will contribute to an annual contraction in GDP of close to 10% for 2020. And that, with the tricky ‘annualised’ concept stripped out, means that the total economic production in 2020 will be 10% lower than the total economic production last year.
Interest rate cuts and other positive signs
Dr Saville, who said there was a 50-50 chance of a 25 basis point rate cut at the next MPC meeting, offered some positive news. An early assessment of alternative data streams such as VAT receipts and Google activity data point to a resurgence economic activity in the third quarter. This means we could expect a third quarter quarter-on-quarter, annualised rebound of at least 50%; not forgetting how ‘contrived’ and ‘meaningless’ this number might be. Growth seems to be driven by the agriculture and mining sectors, which is good news, while sectors such as manufacturing, trade and transport have nowhere to go but higher!
We can argue for days about which statistic offer the best overview of the economic impact of COVID-19. From my experience as a freelance writer and small business owner, the best comparison remains this year’s performance versus the comparable period in the prior year. That is, after all, the basis for measuring our sales performance. Statistics South Africa has already provided stark evidence of the impact of lockdown on a range of sectors. Not so long ago they release four surveys comparing the revenues generated by certain sectors in April, May and June 2020 versus the year prior. These tangible examples include the unit nights sold in the tourism sector being down 97.1%, 97.3% and 92.36% for those months; and the motor trade, measured by new vehicle sales, being down 92.2%, 59.8% and 5%.
Deep, deep trouble
Whether you prefer the 51% quarter-on-quarter, annualised number or the 17% decline in Q2 2020 versus Q2 2019, there is no arguing against the raw, tangible experience suffered by restaurants, who saw total revenues for food sales plummet from R2.84 billion in April 2019 to zero in the same month this year. And June numbers, under relaxed lockdown, remain at a third of 2019 levels. Whichever way you slice the statistics, South Africa Inc is in deep, deep trouble.
