Investment in South Africa

South Africa - Investment

South Africa: Economy sinks deeper into recession in Q1

The economy slid deeper into recession in the first quarter, contracting 2.0% over the previous quarter at a seasonally-adjusted annualized rate (SAAR) amid lockdown measures to contain the spread of the coronavirus. The result came in below Q4’s 1.4% drop and marked the sharpest contraction since Q1 2019. In year-on-year terms unadjusted terms, the economy dipped 0.1% in Q1, less sharply than Q4’s 0.5% fall.

Collapsing investment activity and eviscerated foreign demand for exports spearheaded the first-quarter downturn. Fixed investment sank 20.5% SAAR in Q1, worsening from Q4’s 10.0% plunge and marking the sharpest contraction in over a decade amid crumbling investor confidence and soaring economic uncertainty. On a slightly more positive note, household consumption held up better at the outset of 2020, with growth halving to 0.7% in Q1, from 1.4% in the previous quarter. Meanwhile, public spending rebounded from a 0.2% contraction in Q4 and rose 1.1% in Q1, further softening the overall blow, as the government aimed to prop up the economy.

On the external front, exports contracted 2.3% in Q1, reversing Q4’s 2.3% expansion, as faltering foreign demand and disrupted global supply chains due to fallout from Covid-19 hammered commodity exports. Nevertheless, the external sector’s contribution to growth improved significantly in Q1 compared to the previous quarter as imports plummeted 16.7% in Q1—the sharpest drop in over six years—driven by decreases in machinery and electrical equipment, mineral products and travel services.

The economy slid deeper into recession in the first quarter, contracting 2.0% over the previous quarter at a seasonally-adjusted annualized rate (SAAR) amid lockdown measures to contain the spread of the coronavirus. The result came in below Q4’s 1.4% drop and marked the sharpest contraction since Q1 2019. In year-on-year terms unadjusted terms, the economy dipped 0.1% in Q1, less sharply than Q4’s 0.5% fall.

Collapsing investment activity and eviscerated foreign demand for exports spearheaded the first-quarter downturn. Fixed investment sank 20.5% SAAR in Q1, worsening from Q4’s 10.0% plunge and marking the sharpest contraction in over a decade amid crumbling investor confidence and soaring economic uncertainty. On a slightly more positive note, household consumption held up better at the outset of 2020, with growth halving to 0.7% in Q1, from 1.4% in the previous quarter. Meanwhile, public spending rebounded from a 0.2% contraction in Q4 and rose 1.1% in Q1, further softening the overall blow, as the government aimed to prop up the economy.

On the external front, exports contracted 2.3% in Q1, reversing Q4’s 2.3% expansion, as faltering foreign demand and disrupted global supply chains due to fallout from Covid-19 hammered commodity exports. Nevertheless, the external sector’s contribution to growth improved significantly in Q1 compared to the previous quarter as imports plummeted 16.7% in Q1—the sharpest drop in over six years—driven by decreases in machinery and electrical equipment, mineral products and travel services. Commenting on the result, Andrew Matheny and Dylan Smith, economists at Goldman Sachs, noted:

“We interpret the smaller contraction in Q1 as having a bearing on the timing rather than magnitude of the Covid shock, and therefore shift more weakness into our Q2 growth projection (now at -35% annualized) and leave our full-year GDP forecast of -7.5% unchanged. Although some of the weakness in Q1 clearly relates to the Covid shock, the contraction in investment and imports also represents a continuation of the pattern of weakness observed in Q4 2019 (prior to the Covid shock).”

FocusEconomics Consensus Forecast panelists project the economy to shrink 7.1% in 2020, which is down 1.0 percentage points from last month’s forecast. In 2021, GDP is seen growing 3.0%.