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<p><em>By: <a href="http://null/" target="_blank" rel="noreferrer noopener">Reza Hendrickse, Portfolio Manager at PPS Investments</a></em></p>

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<p>The South African economy contracted for the fourth consecutive quarter, plunging deeper into recession. Gross Domestic Product (GDP) in the second quarter was half that of the first quarter, having declined by 51.0% in Q2, and by 17.1% on a year-on-year basis. The reported numbers were slightly worse than expected, but forecasts were understandably difficult to make under the circumstances. During the quarter, economic activity was severely impacted by the precautionary hard lockdown measures, which sought to contain the spread of COVID-19. Today’s data release confirms the reality that the economic cost has been very severe.</p>

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<p>All three of the main economic sectors contracted sharply for the quarter, and amongst the underlying industries, agriculture was the only area which grew. The primary sector, representing agriculture and mining contracted 59.1%, with a 73.1% reduction in mining output overshadowing the 15.1% rebound in agriculture. The secondary sector contracted 72.0%, with manufacturing and construction output falling by around three quarters, virtually grinding to a halt. The tertiary sector which is usually resilient, shrank by 40.0%, with all of the underlying industries measured having contracted. </p>

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<p>The extent of the fall in production was widely anticipated, and reflects a similar trend to what has been experienced in other countries around the world. South Africa was not alone in implementing the lockdown, but was an outlier by being relatively early to impose the shutdowns and late to lift restrictions. A strict curb on the sale of alcohol and tobacco was another defining feature of the local lockdown, which drew criticism from some.</p>

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<p>Looking ahead, and with the economy gradually having started up in the third quarter, we anticipate a measured short term rebound in domestic growth. Unfortunately, longer term growth prospects, which had been weak prior to COVID-19, have been further impaired. Businesses have taken enormous strain this year, and many will not survive, while consumer spend will be affected by an expected rise in unemployment. Conditions have also been further exacerbated by the resumption of load shedding, which places additional burden on productive capacity. National Treasury and the International Monetary Fund currently expect 2020 GDP growth of between -7% and -8%, but in order to meet these, we will need to start seeing evidence of green shoots developing, as well as a positive interim growth surprise.</p>

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