South Africa's GDP shrinks 51% in second quarter over coronavirus woes

The decline in GDP has also pushed the economy into its longest recession in 28 years

Local tourists seen in Cape Town, South Africa. The country is experiencing its longest recession in the last 28 years. AP  

South Africa’s restrictions to curb the spread of the coronavirus put the economy into its longest recession in 28 years, with gross domestic product contracting more than expected in the second quarter.

GDP shrank an annualised 51 per cent in the three months through June from the previous quarter, compared with a revised 1.8 per cent contraction in the first three months, Statistics South Africa said on Tuesday in the capital, Pretoria. That’s the steepest decline since at least 1990 and extended the recession into a fourth quarter, the longest period of consecutive quarterly contractions since 1992.

The median estimate of 17 economists in a Bloomberg survey was for a 47.2 per cent drop in output from the previous quarter. Year-on-year, the economy contracted 17.1 per cent, more than the median estimate of 16 per cent.

A strict nationwide lockdown that started on March 27 deepened the slump in an economy that’s stuck in its longest downward cycle since at least the Second World War. Enforced by the police and military, people were only allowed to leave their homes to buy food, collect welfare grants and seek medical care unless they provided essential services. While a gradual reopening of the economy started on May 1, many companies closed down permanently or fired workers during the shutdown.

Output shrank more than the central bank’s estimate of a 40.1 per cent annualised contraction, increasing the chances of a sixth interest-rate cut this year. Governor Lesetja Kganyago said last month that muted inflation gives the monetary policy committee room to respond if the nature of the shock caused by the pandemic turns out to be worse than forecast.

“It adds to the case to cut by 25 basis points,” said Nazmeera Moola, head of South African investments at asset manager Ninety One in Cape Town. “We expect 25 either now or the following meeting, but I think this data helps to increase the case for a cut next week.”

The continued contraction is likely to weigh on revenue collection and the government’s efforts to stabilize debt and narrow the budget deficit. It will also make it more difficult to lower the unemployment rate of 30.1 per cent that is seen as one of the biggest obstacles to reducing poverty in one of the world’s most unequal nations.

While the Reserve Bank forecasts a rebound with annualised growth of 17.5 per cent in the third quarter, continued power cuts in what’s already a record year of outages and slow reforms could threaten the recovery.

“The level of economic activity is only likely to return to pre-Covid-19 levels by 2023-24,” said Sanisha Packirisamy, an economist at Momentum Investments. The difference between actual and potential growth “will likely keep a lid on inflation in the near term”.