Forces conspire to unexpectedly brighten our growth prospects
• The power with which the economy has bounced back has caught us somewhat unawares
After global GDP shrank 3.5% in 2020 — the worst contraction since World War 2 — the IMF now expects that in 2021 it could be as much as 2% above prepandemic levels.
This is a swift turn of events, one that would not have been possible without developed economies, led by the US, blowing their budgets, and central banks assisting by buying government bonds on an unprecedented scale.
Monetising gaping budget deficits drove bond yields to record lows, where they have stayed, more or less. Initially this much fiscal and monetary stimulus helped power a marked rally in global equity prices — after collapsing a third in the first quarter of 2020 the MSCI world index is now 25% above where it started last year.
But now policy support is greasing the wheels of the global economic revival as countries reopen and vaccine rollouts gain momentum.
With a budget deficit of 7% of GDP and an economy in recession even before the pandemic struck, SA did not have the fiscal space to go all out. Eventually however, after some tax relief and increased spending on social and welfare measures, medical supplies and small and medium enterprise (SME) assistance, effective budgetary support came to a non-negligible 3%-4% of GDP.
Additionally, as inflation tanked due to falling oil prices and domestic expenditure collapsing during lockdown, the Reserve Bank could supplement the government’s fiscal efforts with aggressive interest rate cuts, taking the bank rate to a near 50-year low. Yet, despite these emergency measures the country could not escape the full onslaught wrought by the pandemic. At the height of lockdown household disposable income, which in aggregate hardly ever falls, shrank as businesses closed down and many of the remaining ones slashed headcounts and pay.
Amid falling consumption and heightened economic uncertainty, fixed investment was cut as well. Risk-averse firms, households and banks caused growth in private sector credit extension to falter quickly. Also not spared were JSE equities. Buckling under the weight of the deep global as well as domestic recession, the prices of resources and SA Inc stocks nosedived.
COMMODITY PRICES
Looking back, the biggest surprise was not so much the extent of the contraction in global GDP. Given the broad reach of Covid-19 and the harsh lockdowns the spreading virus gave rise to, the loss in global output was always going to be marked and widespread.
Rather, it was the power with which the global economy bounced back in the second half of 2020 and the continued recovery into this year, that have caught us somewhat unawares. The same holds true for SA.
While a domestic rebound was never in doubt given last year’s low base, various forces have conspired to brighten growth prospects even more than expected. One is the spectacular rally in some of SA’s export commodity prices, notably platinum group metals.
Boosted by factors such as US dollar weakness, rapid growth in China, production difficulties and a renewed focus on the transition to green energy, prices rocketed from their early 2020 lows. The implication is that last year alone mining exports ballooned by R100bn.
Booming agricultural exports added R20bn more. As profits of commodity exporters have surged so companies with mining and agriculture as clients have benefited too. The trickle-down effects have been noticeable.
Another force is the surprisingly rapid recovery in disposable income and, related to that, consumer spending. Already by the end of 2020 household income had surpassed its prepandemic level as headcount and wages, which were cut last year in lockdown-sensitive sectors, have been normalising.
Helpful too have been the Covid-19-specific income support measures, some of which have been extended often; the additional income derived from the president’s expanded public works programme; and the notable financial benefit borrowers have enjoyed (they far outnumber savers), given 2020’s aggressive interest rate cuts.
Despite a degree of lockdown restrictions prevailing, retail sales volumes in the first quarter of 2021 stood at about 95% of their December 2019 level.
Even the moribund housing market is showing signs of life as the improved affordability of home loans and the need for a better work-from-home environment have spurred demand for housing.
With the rand steadily strengthening from last year’s heady level of R19 to the dollar to R14, this should help keep inflationary impulses at bay, so reducing the likelihood of interest rate hikes soon. The much-maligned JSE equity index is double its lowest point
of last year, and 25% higher than it was pre-Covid-19.
Add the strengthening currency, and in US dollar terms it has strongly outperformed global equity indices. The notable rally in local small cap stocks squares with the beneficial trickle-down effects related to rising commodity prices and encouraging early signs of public infrastructure rollouts.
We recently revised our GDP growth forecast upwards, which is a welcome change from prior years. There are many dangers to SA’s economic recovery, but growth near 4% looks possible for 2021.
Without speedy and forceful business-friendly reforms, this pace simply won’t be sustained. We must not let this opportunity go to waste.
THERE ARE MANY DANGERS TO SA ’ S RECOVERY, BUT GROWTH NEAR 4% LOOKS POSSIBLE FOR 2021