JOHANNESBURG, 8 SEPTEMBER 2020 – As expected, the countrywide lockdown to fight the spread of COVID-19 from 27 March 2020 severely affected economic activity in the second quarter as real output contracted, plunging the economy deeper into depression, Steel and Engineering Industries Federation of Southern Africa (SEIFSA) Chief Economist Dr Michael Ade said today.
“The impact of the nationwide economic shutdown is visible in the numbers as there was virtually no economic activity in April, spanning lockdown alert level 5. Many companies, including the large entities, were not ready for the sudden shock that impacted negatively on supply chains and on global demand and exports,” Dr Ade said.
He said the data, which provides a fair depiction of overall domestic consumer-derived demand and industrial production, provides insight to what we can expect in terms of other macro-economic data, including the employment numbers, the release of which has been postponed to later this month. He said as unemployment rises, middle-class income stagnates or even declines, reducing the pool of buyers for goods produced by business, which leads to reduced business activity and investment.
Alarmingly, South Africa’s real gross domestic product (GDP) decelerated to 51% in the second quarter of 2020, down from a revised 1,8% quarter-on-quarter (q/q) decrease recorded in quarter one of 2020, extending the economic recession into its fourth quarter. Nearly 91% of industrial sectors performed poorly, with the manufacturing sector recording the largest negative contribution to GDP growth, with a -10,8 percentage point decrease.
Dr Ade said the poor GDP figures are underpinned by poor year-on-year growth in manufacturing production data, low sales and a generally poor business expectation for the relevant quarter, despite an uptick in the manufacturing purchasing managers index (PMI) in May and June.
“In addition, production costs in the second quarter of 2020 were higher than in the first quarter, as scarcity and higher demand for inputs pushed prices and operational expenses up. Companies were in uncharted territory where they had to still incur costs, despite the lockdown, but could not produce and sell. The situation was made precarious by prevailing subdued domestic demand and the companies’ inability to explore new markets or export. These impediments also affected their margins negatively,” Dr Ade said.
He added that the majority of companies in the Metals and Engineering (M&E) cluster were expected to benefit from higher domestic selling prices as captured by the producer’s price indices (PPI) for intermediate manufactured goods, enabling them to improve on margins and profits.
“However, the PPI also measures selling price inflation for final manufactured goods and its poor performance in quarter two of 2020, relative to quarter one, constrained companies from invariably increasing selling prices. The constraint on increasing selling prices, together with lower output in the M&E cluster, negatively impacted on firms’ total revenue, while also negatively affecting profitability, thus leading to a vicious cycle,” he said.
Still, Dr Ade lauded ongoing initiatives to improve supply-side dynamics that could boost third-quarter growth in 2020 as the economy opens up, further supporting the expansion of the M&E sub-components in the short to medium term. He cited the implementation-oriented Infrastructure Investment Plan for South Africa and the Steel Master Plan, which are aimed at reigniting business activity via improved trade, domestic demand and competitiveness, as holding huge potential for the M&E industry.
Dr Ade pointed out that the economy was already under pressure before the commencement of the nationwide lockdown at the end of March, with the level of real GDP 0.1% lower in the first quarter of 2020 than a year earlier. He said although manufacturing production levels dropped significantly in April, May and June of 2020, the expectation is for a better performance in quarter three of 2020.
“Industrial production can only go up from the abyss businesses found themselves in because of the COVID-19 pandemic. Broader recovery is a must, given the importance of the manufacturing sector – including its M&E sub-cluster – in boosting local jobs and economic growth,” Dr Ade said.
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