Expected Dismal Performance Of The Economy In Q1 2020 Compounds Prevailing Challenges Faced By Local Businesses

Johannesburg, 30 June 2020 – A further decline in the real Gross Domestic Product (GDP) for the first quarter of 2020, and by extension domestic demand, is disconcerting as beleaguered businesses continue to face headwinds amid spiraling operational expenses, rising intermediate input costs underpinned by a volatile exchange rate and the global coronavirus pandemic, the Steel and Engineering Industries Federation of Southern Africa said today.

The GDP data released by Statistics South Africa, this morning, indicated that South Africa’s real GDP decreased by 2.0 percent during the first quarter of 2020 from a seasonally-adjusted decrease of 1.4 percent in the fourth quarter of 2019. Disconcertingly, the broader manufacturing sector (including its diverse metals and engineering cluster of industries) was amongst the largest contributors to the decrease in the Q1 2020 GDP, contributing -1.1 percentage points.

Speaking after the release of the data, SEIFSA Economist Marique Kruger said the stagnant economic growth environment makes it increasingly difficult for companies in the metals and engineering cluster of industries as well as the broader domestic economy to properly plan business activities as the domestic market is under pressure.

“The poor performance was expected especially given the fact that the fundamentals of the economy were weak, with almost all economic data coming from a low base underpinned by two technical recessions in the past two years. Moreover, changes in inventories in the first quarter contributed -3.4 percentage points to total growth, while Gross fixed capital formation decreased by 20.5 percent, contributing -4,2 percentage points; with the negative trends forecasted to continue in the mid-term,” said Ms Kruger.

For broader context, tax revenue collection as a percentage of GDP has been painfully trending at 25.9 percent, below the benchmark of 30 percent, thereby making it very difficult for the government to finance key municipal and provincial infrastructural projects, needed to reboot economic activity and demand. Also, the twin deficits comprising of the current account and budget deficits are worryingly deteriorating, spiraling out of control, and drawing criticisms from main international rating agencies including Moody’s, on South Africa’s ability to reindustrialize the economy, and service existing domestic and international debts. Given South Africa’s weak track record of fiscal consolidation in recent years – in which more lip service has been paid than actual implementation – and the weak medium-term economic outlook, debt stabilisation by 2023 as recently outlined by Finance Minister Tito Mboweni will be very difficult to achieve.

“Businesses are in an unchartered territory with systematic distortion of domestic and regional supply chains from the lockdown caused by the COVID-19 pandemic. The dismal real GDP data means that South Africa is officially in a depression, with the gloomy performance expected to persist in Q2 of 2020. Both producers and consumers continue to struggle, effectively making it very difficult for the successful implementation of policies aimed at sustainably reviving the domestic economy in the short term,” Ms Kruger said.

She said the advent of the global coronavirus pandemic nevertheless presents a unique opportunity for policy makers to rejig the economy through incentives aimed at increasing the demand for locally manufactured goods in order to improve production and growth.

Ms Kruger further highlighted the need to increase focus on initiatives aimed at protecting local productive capacity and also to increase the commitment of state-owned enterprises to support local procurement. These interventions would assist in ensuring the survival and sustainability of local companies in the shorter term towards higher levels of demand and production.

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