Covid locking out growth

First quarter not as bad as feared, but economists see dire contraction coming

● The economy could contract more than 50% in the second quarter as a result of the lockdown and many economists still expect a full-year contraction of as much as 10%, despite first-quarter numbers that were not as bad as expected.

This comes as Business for SA (B4SA) readies to publish a comprehensive economic recovery plan, which it previewed this week with President Cyril Ramaphosa.

B4SA, the umbrella body that has led business’s response to the Covid crisis, has repeatedly warned that the pandemic has made reforms to boost growth even more pressing, urging the government to work with the private sector to put immediate measures in place to enable investment and create jobs.

Presidency spokesperson Khusela Diko confirmed on Friday that B4SA had met the president and a number of economic-cluster ministers.

GDP figures released this week by Stats SA show SA’s economy contracted 2% in the first quarter. This was better than economists’ consensus forecast of about 4%, thanks mainly to a bounce in agriculture, but it was the third negative quarter in a row for the first time since the global financial crisis of 2007/2008.

SA hasn’t experienced four consecutive negative quarters since it began compiling official national accounts (GDP) statistics in 1946.

With the economy all but shut down in April and reopening only gradually in May and June, economists can only guess how bad the second-quarter numbers will be — and to what extent the economy can recover in the second half.

Even Reserve Bank and National Treasury forecasts of a 7% contraction for the year imply a 30% contraction in the second quarter, but Absa economists Miyelani Maluleke and Peter Worthington expect worse, with a 50% slide in the second quarter and a full-year contraction of 8.9% or more.

Matrix Fund Managers strategist Carmen Nel says it is still unclear how much the demand side of the economy has been hit by consumers losing income and changing their behaviour in the face of the pandemic, and how much the supply side has been affected by disruptions to supply chains.

There is also the risk of a second wave of coronavirus infections hitting SA’s trading partners and exports later in the year, she says.

Economists note that the most concerning figure in the GDP numbers is the 20.5% contraction in investment spending, which

With the rand being close to fair value … economic players can reasonably count on some stability

Neville Mandimika

RMB economist

has been positive for just four quarters in the past four years, reflecting very weak business confidence and policy uncertainty.

Meanwhile, the Absa purchasing managers’ index for June showed conditions in manufacturing continued to improve after much of the sector came to a near standstill in April and resumed only limited production in May.

This week’s data on the economy came as the rand broke through R17/$. The currency is now significantly stronger than in March when the Covid crisis took hold, but still weaker than the R14.50 at which it began the year. It has been helped by the resumption of capital inflows to emerging markets, with quantitative easing in major economies sending a wash of liquidity into risk assets in search of higher yields.

The rand was also briefly boosted this week by news of a first-quarter surplus in the current account of SA’s balance of payments, for the first time in 17 years.

And the Institute for International Finance (IIF) said in a note on SA this week that its daily portfolio capital flows tracker indicated that nonresident investors had made modest net purchases of domestic bonds since late May, following substantial net sales from March to mid-May.

Nolan Wapenaar, co-chief investment officer at Anchor Capital, says the rand has been oversold and has been pulling back towards its fair value of about R15. He expects a “next leg” of the recovery in three to four months as the US economy strengthens.

However, Rand Merchant Bank, which this week released its latest “milk index”, reckons the rand is now trading at close to its fair value of about R17.36/$. The milk index, which compares the price of milk in African countries to gauge whether currencies are undervalued or overvalued, is similar to The Economist magazine’s Big Mac index of currencies.

“The advantage of being close to fair value is that there is no economic pressure on the currency to weaken … or strengthen … So economic players can reasonably count on some stability,” said RMB economist Neville Mandimika.

The IIF said sustained, further nonresident purchases would help lower long bond yields and support the rand. But “for foreign investor interest in South African assets to remain over the medium term, the government will need to deliver a credible fiscal consolidation plan in the October MTBPS [medium-term budget policy statement]”.

Matrix Fund Managers’ Nel says as long as the economy is not fundamentally competitive, the only way it can compete is with a weak rand.