US economy contracts sharply — and South Africa’s will fare even worse

In the fourth quarter of 2019, the US economy expanded by 2.1%. In that same period, South Africa’s contracted by 1.4%.

On Wednesday 29 April, the US Bureau of Economic Analysis released its “advance” estimate on the performance of the world’s largest economy in the first quarter of this year. It showed a 4.8% contraction, worse than a Reuters consensus poll that saw a 4% fall in gross domestic product (GDP).

There are a number of take-aways here for South Africa’s economy, and none are good. In the US case, the economy was hardly touched by the pandemic in January.

Activity in the US only really began slowing in March as the pandemic surged and even President Donald Trump began to realise it was a problem. So it was only in the last month of the quarter that the US economy began to freeze up, after 2.1% growth in the previous quarter. And it was only in the last two weeks of March that millions of Americans began filing for unemployment benefits – the US GDP reading is really the tale of a fortnight.

And it still shrank by 4.8% – or a fall of 6.9 percentage points compared to Q4 2019. In a matter of weeks, the pandemic wreaked that kind of economic havoc.

This is a bad omen for South Africa.

South Africa’s shutdown also only began in earnest in March, culminating in the nationwide lockdown in late March. January and February seem like another epoch now.

In February, South African mining companies were still not reporting any material decline in demand from China, where the coronavirus originated.

But if March was such a blow in the US, it will be even worse here. If South Africa’s GDP were to also shave off 6.9 percentage points, it will mean a contraction of more than 8%, and given the underlying weakness in the economy, potentially more.

And the second quarter began in lockdown, with April effectively lost, outside of a handful of sectors, none of which have been operating at full tilt, and only a phased reboot now taking place.

Professor Haroon Bhorat of the School of Economics at the University of Cape Town recently gave an eye-opening presentation.

Several sectors in SA, including construction and clothing retail, are operating at below 20% of capacity. Looking at a consensus of various forecasts, South Africa’s economy is predicted to contract by 6.4% for all of 2020. This figure will depend on the pace of lockdown regulations and a number of other factors, including the effectiveness of the massive fiscal and monetary measures that are being applied.

But the Q1 and Q2 numbers will surely be even worse. Double-digit declines may well be in the offing. BM