The Implications Of The Second Quarter 2020 Gross Domestic Product Data

Introduction

The headline in Statistics South Africa’s Statistical Release on second quarter GDP reads:

GDP in the second quarter of 2020 fell by 51.0%,

with a footnote indicating that the growth rate is quarter-on-quarter, seasonally adjusted and annualized, and calculated using constant prices[1]. This approach to reporting is standard and in normal times it gives a good indication of short-term growth. But it is misleading when there has been a sharp and temporary shock, as several commentators have already observed. The 51% drop in GDP would occur if the GDP continued to contract at the same rate for the four quarters as it did between the first and second quarter. But nobody expects that to happen. There are indications from monthly output statistics that recovery is under way. The only question is how far and fast it will proceed, and whether the recovery will be derailed by a second wave of the epidemic. 

One way of moving to a more sensible assessment is to de-annualize the growth rate. The drop in GDP then reduces to 16.3% between the first and the second quarter. Another way is to consider the drop in GDP between the second quarter of 2019 and the second quarter of 2020. In this case, there is no need for seasonal adjustment since the seasons are the same. This drop was 17.3%. 

One can go further and ask what the impact of the epidemic both nationally and globally (since GDP is affected by exports and imports) and the measures taken to counter it was on the South African economy. To do this, one needs an estimate of what GDP would have been without the epidemic. The indications are that it would have been lower than in the first quarter in real terms, since South Africa had entered a recession before the onset of the epidemic, so that the drop associated with the epidemic was probably in the 15-16% range. On that basis, the cost of the epidemic in foregone output in the second quarter was R 200 billion, in round terms. There will be further costs in subsequent quarters but, absent a resurgence of the epidemic, they will become progressively smaller.

The distribution of the burden

It is not possible to have the last word on the distribution of the burden of the epidemic in the second quarter at this stage. For that, we have to wait for the release of the second quarter Quarterly Employment Statistics (scheduled release date: 15 October) and the Quarterly Labour Force Survey (scheduled release date: 27 October). The QLFS, when released, should be compared with the findings of the National Income Dynamics Study’s Coronavirus Rapid Mobile Survey.

But it is possible to have a first word[2]. Table 1 in the Annexure presents information on the value added by industrial sector at basic prices in the first and second quarters of 2020. The national accounts build up price formation in three stages. The first stage is factor cost: the value of compensation of employees and of gross operating surplus. The second stage is basic prices. The basic price is the amount receivable by the producer from the purchaser for a unit of a good or service produced as output minus any tax payable, and plus any subsidy receivable, by the producer as a consequence of its production or sale. Valuation at basic prices modify gross operating surplus. The third stage is market prices, where basic prices are further modified by taxes and subsidies on products, mostly value added and excise taxes. The table presents information in seasonally unadjusted current price, so the effects of inflation, currently low, and of season are included in the changes between the first and second quarters.

Table 1 shows that:

1. Total value added at basic prices fell by 11.4% between Q1 and Q2. The fall in compensation of employees fell by 6.2%, while gross operating surplus fell by 17.3%. In broad terms, capital has taken a greater hit than labour, though the position is complicated by the fact that the incomes of working proprietors who did not specifically pay themselves a wage are paid from gross operating surplus.
   
   
2. The worst hit sectors were trade, catering and accommodation, transport, storage and communication, manufacturing, construction, and mining and quarrying. With the exception of transport, storage and communication, these are predominantly privately owned industries. By contrast, the predominantly state owned sectors of electricity, gas and water and general government services actually increased value added at basic prices. The exception to this private/public sector differential is agriculture, a sector in which seasonality is most pronounced and where favourable weather has played a role.
   
   
3. The pattern of changes in compensation of employees broadly follows the pattern of changes in value added, but at lower rates. While value added dropped by 22.0% in the worst hit sectors, compensation of employees fell by 12.5%. The Quarterly Employment Survey, when released, will shed light on how changes in compensation of employees has been partitioned between changes in employment and changes in average monthly earnings.
   
   
4. Sharp drops in gross operating surplus, above 30% in manufacturing and trade, catering and accommodation and between 25% and 30% in construction and transport, storage and communication, raise concerns about the survival of many businesses in these sectors, and about the financial position of state-owned enterprises in the transport sector.

Table 2 in the Annexure shows changes in the components of household expenditure. Household expenditure fell by 14.0% between Q1 and Q2. Increased uncertainty will have made households more cautious about expenditure, influencing demand. But the fact that household expenditure fell much further than compensation of employees, and changes in the pattern of spending indicate the presence of supply constraints arising from lockdown regulations. The components of household expenditure where the fall was greatest were restaurants and hotels, alcohol beverages, tobacco and narcotics, recreation and culture, clothing and footwear, and transport. All falls in these components were above 30%. These falls compare with a fall of 4.8% in spending on food and non-alcohol beverages. 

Conclusion

Two points, by way of conclusion:

1. The inequality between the impact on private sector and public sector compensation of employees should be taken into consideration when wages and salaries in the public sector are determined in the next couple of years.
2. Many households will have deferred expenditure during the most severe phases of the lockdown and catchup spending will be a factor stimulating demand as the lockdown is relaxed.

Charles Simkins
Head of Research
charles@hsf.org.za

Annexure

Table 1

Table 2: Final consumption expenditure by households

[1] Statistics South Africa, Gross domestic product: Second quarter 2020. Statistical Release P0441, 8 September 2020