The recent growth, which defied IMF predictions, can be attributed to global demand for resources linked to infrastructure led recoveries and pandemic-related decompressions around the world which have led to high commodity prices. This, coupled with a bumper agricultural export performance and the added benefit of Covid relief grants, have helped the economy recover off what was arguably a low base. It’s important to understand that this growth is partly the result of pent up demand which built up during 2020.
The big question in the next few months is whether this short-term growth can be translated into long-term sustainable momentum. One of the most significant risks to the country’s economic recovery continues to be the Covid-19 pandemic, including the Delta variant currently driving South Africa’s third wave of infections which resulted in government moving the country back to level 4 and stricter lockdown restrictions in late June.
Whether the recent economic growth levels can be maintained will largely depend on how quickly and effectively South Africa can roll out its vaccination programme - which to date has been far too slow - the extent to which commodity prices will hold up, whether inflation will result in the South African Reserve Bank (SARB) and other global reserve banks increasing interest rates, how quickly South Africa’s infrastructure programme gains traction, the extent to which consumer confidence will be impacted by the end of the Covid relief grants, and how successful National Treasury is in containing the public sector wage bill.
Recent reports indicate that National Treasury is not managing to be as successful in containing the public sector wage bill as it had hoped to be. Paradoxically, the improvement in economic performance might actually work against Treasury when it comes to wage negotiations.
Of concern is the fact that the agricultural sector – one of the sector’s driving the country’s recovery and which contributes around 20% to GDP through the entire value chain – is losing jobs with employment falling by 8% in the first quarter of 2021, according to Statistics South Africa.
Another concern is that although corporate tax collections are back to pre-Covid levels - a large part of which is being driven from the strong performance of the miners - personal tax collections have not recovered to the same extent. The latter constitutes the majority of the tax bill. The fact that personal tax collections have not recovered to the same extent indicates that pandemic-led retrenchments may turn into permanent job losses. Unemployment – long South Africa’s Achilles heel - is likely to be further exacerbated by the recent level 4 restrictions on alcohol sales and in-restaurant dining.
While the commodity rally is good news for the economy, the question must be asked whether mining companies will be re-investing their elevated profits into expanding supply side capacity or will pass the benefits on in the form of dividends. The latter augers well for tax collections and National Treasury but is not as positive for long-term economic growth.
Inflation is expected to continue to rise and to an extent this has already been priced in to the market. Contingent on the uptick in inflation, expect one or two twenty-five basis point increases in interest rate before the end of the year. Given the fragile state of the economy, the SARB will be acting cautiously so as not to tighten interest rates too quickly.
The uncertainty arises should inflation rise more than or faster than expected. In the case of the latter, expect markets to come off to some extent, off the back of an increase in interest rates or even faster than expected withdrawals from central bank bond buying programmes. However, if the future is deflationary than markets are likely to do better.
The recent strength of the Rand has been a boon for importers. Local factors likely to influence the Rand in the remainder of the year include the local elections, the impact of the third wave of Covid-19 infections - which is likely to be worse than the first wave - and an expectation that the level 4 restrictions will be extended. Recent court judgements against those implicated in corruption and the trade surplus are both encouraging factors in the Rand’s favour.
However, myopically focusing only on local factors where Rand movement is concerned is a mistake given the extent to which international factors play a role. The market will be watching the inflation trajectory in the US with interest given that US rates have a significant impact on the movement of the local currency.
The Rand continues to be an extremely volatile currency and its recent strength is not an indicator that the economy is through the quagmire. In fact, it’s a good idea to protect risks inside a portfolio and not be carried away by currency movements, particularly given the anticipated long-term trend of Rand weakness and higher inflation than our trading partners
An economic recovery is inextricably linked with confidence. Consumer confidence is currently low and business confidence will likely follow suit which does not auger well for a sustained economic recovery. There is no quick fix to re-building confidence but a concerted effort at rooting out corruption, stopping fruitless and wasteful expenditure at local government level, removing barriers to business such as policy and regulatory uncertainty and releasing spectrum would go some way to restoring faith in the government’s handling of the economy. Ultimately, the focal point of government’s effort need to be on becoming an enabler of growth given that this is the only solution to the majority of South Africa’s challenges.
|This article, "Economic outlook: The trends to be watching out for" was written exclusively for Finweek Magazine. It was published in the 23 July 2021 edition on page 26. You can access the original print coverage in English here, and in Afrikaans here.
Make sure to subscribe to Finweek to ensure you don't miss out on insight articles like these.