The Steel and Engineering Industries Federation of Southern Africa (Seifsa) says the 2% contraction in South Africa's gross domestic product (GDP) in the first quarter of the year is disconcerting, as beleaguered businesses continue to face headwinds.
The federation explains that businesses are already facing spiralling operational expenses and rising intermediate input costs as a result of the volatile exchange rate and the impact of the Covid-19 pandemic.
The broader manufacturing sector, including the metals and engineering (M&E) cluster of industries, was among the largest negative contributors to the first quarter’s GDP, contributing -1.1 percentage points.
Seifsa economist Marique Kruger states that stagnant economic growth makes it increasingly difficult for companies in the M&E cluster of industries and the broader domestic economy to properly plan business activities, since the domestic market is under pressure.
“The poor performance was expected especially given the fact that the fundamentals of the economy were weak, with almost all economic data coming from a low base underpinned by two technical recessions in the past two years.
“Moreover, changes in inventories in the first quarter contributed -3.4 percentage points to total growth, while gross fixed capital formation decreased by 20.5%, contributing -4.2 percentage points; with the negative trends forecasted to continue in the mid-term,” Kruger explains.
For broader context, tax revenue collection as a percentage of GDP has been painfully trending at 25.9%, below the benchmark of 30%, thereby making it very difficult for the government to finance key municipal and provincial infrastructural projects, needed to reboot economic activity and demand.
Also, the twin deficits comprising the current account and budget deficits are worryingly deteriorating, spiralling out of control, and drawing criticisms from main international rating agencies including Moody’s, on South Africa’s ability to reindustrialise the economy, and service existing domestic and international debts.
“Given South Africa’s weak record of fiscal consolidation in recent years, which means more lip service has been paid than actual implementation, and the weak medium-term economic outlook, debt stabilisation by 2023 – as recently outlined by Finance Minister Tito Mboweni – will be very difficult to achieve.
“Businesses are in an unchartered territory with systematic distortion of domestic and regional supply chains from the lockdown caused by the Covid-19 pandemic. The dismal real GDP data means that South Africa is officially in a depression, with the gloomy performance expected to persist in the second quarter,” Kruger says.
She adds that both producers and consumers continue to struggle, effectively making it very difficult for the successful implementation of policies aimed at sustainably reviving the domestic economy in the short term.
However, Kruger puts forward that the advent of the Covid-19 pandemic nevertheless presents a unique opportunity for policy makers to rejig the economy through incentives aimed at increasing the demand for locally-manufactured goods to effectively improve production and growth.
She further points out that is it necessary to increase focus on initiatives aimed at protecting local productive capacity and also to increase the commitment of State-owned enterprises to support local procurement.
These interventions would assist in ensuring the survival and sustainability of local companies in the shorter term towards higher levels of demand and production.