South Africa’s lockdown to give way to slow recovery - Capital Economics
Africa Economics

South Africa’s lockdown to give way to slow recovery

Africa Economics Update
Written by Virag Forizs

Even after further easing of South African lockdown measures last week, a quarter of the economy remains closed. And the impact of the lockdown on unemployment and insolvencies will cause long-lasting economic damage that will hold back the recovery. We now expect that GDP will shrink by 11% over the year as a whole.

  • Even after further easing of South African lockdown measures last week, a quarter of the economy remains closed. And the impact of the lockdown on unemployment and insolvencies will cause long-lasting economic damage that will hold back the recovery. We now expect that GDP will shrink by 11% over the year as a whole.
  • Even as the number of new coronavirus cases in South Africa has continued to climb (see Chart 1), the government loosened containment measures further last week. On a five-category scale, the nation moved from level 4 lockdown down to level 3 on 1st June, allowing the entire mining industry, key parts of the manufacturing sector and many more retailers to reopen compared to earlier restrictions.
  • Drawing on government regulations, we have estimated the share of each sector that is permitted to operate at different lockdown levels. And based on the contribution of each sector to South Africa’s gross value added, we have estimated the extent to which the economy is “open”. (See Table 1.) On this basis, about three-quarters of the economy is now permitted to operate, up from around 60% during stage 4 (which lasted one month throughout May). About 85% of the economy will be open when the lockdown moves to stage 2, although the date for that is unknown.
  • Even with much of the country now back at work, we think that the economic recovery will be held back by both demand and supply constraints. Admittedly, demand might pick up sharply at first as pent up demand built up over the more restrictive lockdown stages is released. Long queues to purchase alcohol, which was previously not available for sale, offer some anecdotal evidence of this. It may also explain the sharp rebound in electricity sent out by Eskom, the state-owned power firm. (See Chart 2.)
  • But the initial surge in demand is unlikely to last. Severe restrictions over April and May have done long-lasting damage. According to a survey by the statistical agency, almost 10% of businesses had ceased operations permanently by the end of April. (See Chart 3.) Large losses in income and employment will weigh on domestic demand. According to a TransUnion survey, 14% of respondents lost their job as a result of Covid-19 by mid-May. The unemployment rate, which stood at 29% in Q4 2019, will rise sharply.
  • Consumers may remain cautious even as restrictions are relaxed further. According to Apple routing data, journeys by South Africans are picking up only moderately. (See Chart 4.) A consumer confidence indicator produced by the Bureau of Economic Research showed that sentiment towards making big purchases fell to a new post-apartheid era low in Q1. (See Chart 5.) And the TransUnion survey suggests that 20% of buyers are delaying purchases of homes and cars in the wake of the coronavirus pandemic. Auto sales were down by 65% y/y in May. (See Chart 6.)
  • Fiscal stimulus has been limited by the country’s weak public finances, making a government spending-driven recovery in demand unlikely. And even as external demand picks up on the back of easing containment measures around the globe, it will probably remain weak compared to pre-pandemic levels.
  • What’s more, supply will probably not be scaled up quickly. Firms will take notice of weak demand and keep some capacity idle. In addition, ongoing social distancing measures could put some businesses off from reopening or force them to return to only partial operations.
  • All told, South Africa’s economic recovery is likely to be slow and brittle. Taking into consideration the severe hit to economic activity caused by the lockdown and the sluggish recovery, we now think that South Africa’s GDP will fall by 11% this year. We’ve pencilled in growth of 5.5% next year, which would still leave the level of GDP by end-2021 some 6% lower than its 2019 level.

Chart 1: New Daily Coronavirus Cases*

Chart 2: Eskom Electricity Sent Out (GWh)

Chart 3: Business Status (% Total Survey Respondents)

Chart 4: Apple Maps Routing Requests*
(% Relative to 13th January)

Chart 5: FNB/BER Consumer Confidence Index

Chart 6: New Car Sales (% y/y)

Table 1: Permitted Operations By Sector & Economic Openness Indicator (CE Estimates, %)

Sources: Stats SA, Department of Health, Capital Economics


Virág Fórizs, Africa Economist, virag.forizs@capitaleconomics.com