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- While the decline was grim, South Africa’s economy did not halve between the first and second quarters of the year.
- Stats SA uses annualized data, a technique also used in the US and Canada, to spearhead the change in GDP between quarters.
- But one-off events like a total SA crash can make the data less useful when extrapolated forward.
When Stats SA released the country’s second-quarter growth earlier in the week, the drop in GDP was staggering.
“Real gross domestic product (measured by production) decreased by a record 51.0% in the second quarter of 2020 due to the impact of the Covid-19 lockdown restrictions from the end of March 2020,” the statistics agency said in your report.
A 51% drop would mean that the economy contracted by half between the first and second quarters of the year, a drop greater than the heights of the Great Depression.
But a footnote changes the meaning of the -51% drop. And no, half of the economy did not evaporate due to the hard lockdown. “We are not ending up with half the economy,” said Professor Philippe Burger of the University of the Free State in a statement.
The footnote indicated that Stats SA used annualized data for its GDP predictions. This meant that the change in GDP was shown as continuing and compounding at the same rate for one year, rather than a simple percentage change between two quarters.
Why? Because it made it easy to compare different time periods.
When annualization was removed, the real simple percentage change between the two quarters was -16.4%. While still grim, this was not as bad as the disappearance of half of South Africa’s GDP.
Controversy was now brewing among South African economists and data analysts over which measure to use. While the annualized approach had been used for years, some argued that during the pandemic it created unnecessary confusion.
The reason was that the hard lockdown, which shut down much of the economy in April and May, was not something that would likely repeat itself and win over the next three quarters. But the annualization was calculated on the basis that it would be like this. It’s a forward extrapolation, and you assumed that each quarter would see a further decrease of -16.4%.
“The seasonally adjusted annualized base of -51% quarter-on-quarter refers to the quarter-on-quarter growth of the second quarter of 2020, which is annualized to see what the result of the year would be if in each of the four quarters of 2020 the same repressed level of economic activity was observed. the second quarter of this year, “noted Annabel Obispo of Investec.
When one-off events such as a severe Covid-19 lockdown occurred, causing large fluctuations in quarterly GDP, annualization began to be less useful.
In September 2020, for example, gyms, hair salons, restaurants and cafes were reopened. In April, on the contrary, you couldn’t buy a hot chicken in a supermarket.
South Africa had already moved to lockdown level 2, and President Cyril Ramaphosa was signaling that further relaxation of lockdown restrictions could be at stake.
So what is really going on?
Stats SA’s executive manager of short-term indicators, Michael Manamela, said that Stats SA had always reported annualized GDP as the leading number.
“This practice is the case in South Africa and some countries such as the US and Canada. Although the seasonally adjusted annualized rate is referred to as the headline, Stats SA has always provided estimates for year-on-year estimates and data to derive non-quarterly estimates. annualized, “Manamela said.
This was the case on Tuesday, with Stats SA delivering three figures in its presentation: the annual rate (-17.1%); the non-annualized quarter-on-quarter rate (-16.4) and the annualized quarter-on-quarter rate (-51%).
“Historically, South Africa has used seasonally adjusted annualized quarterly GDP as the leading number. Globally, there is no standard, but the leading number for many countries is year over year or quarter with seasonally adjusted non-annualized quarter,” Manamela said .
Is this a problem only in South Africa?
This was not a conversation that only took place in South Africa.
Tutwa Consulting economic analyst Heinrich Krogman said the same discussion occurred recently in the United States when they announced their GDP figures.
The New York Times reported that second quarter GDP figures in the US could be viewed in different ways, either as an annualized drop of 35% or a non-annualized drop of 10% quarter over quarter.
The newspaper chose to lead with the non-annualized number, noting that when annual rates were applied to short-term changes, they could be “misleading.”
But annualized GDP figures were helpful for comparisons, Krogman noted.
“Reporting the data (or GDP figures for that matter) in this format helps to make a quick comparison regardless of the time period,” Krogman said.
What impact does it have?
Old Mutual Multi-Managers investment strategist Izak Odendaal said that while the way the data was presented greatly influenced how it was perceived, the contraction in GDP announced on Tuesday should not go unnoticed by South Africans.
On the other hand, Odendaal said, the modern world was experiencing economic realities the likes of which had not been seen before and this must be taken into account when considering GDP data and how it is presented.
“Normally annualization is not a problem, but this was not a normal quarter. It is also not bad, as long as people understand what the figures mean. We have always published the annualized figure in South Africa, but some countries do not. As long as you compare countries on the same basis, “Odendaal said.
