The global economy is set for much better growth than anyone would have dared to hope for in the darkest days of the pandemic when businesses were shuttered and mobility severely restricted. This week the Organisation for Economic Co-operation and Development (OECD) upgraded its 2021 growth forecast to 5.8% — a far cry from the anticipated 3.3% in its interim report in March 2020 at the height of economic and personal uncertainty.
But the organisation stressed that this is no ordinary recovery, with growth experiences varying widely across its 38-country membership base. South Africa got a special mention in its May 2021 Economic Outlook because it is only expected to recover its pre-pandemic per capita income levels after five years, in the fourth quarter of 2024, versus 1½ years for the US.
Another telling indicator of the gap between the performance of the fastest-growing economies is that SA’s GDP per capita is 77% lower than the OECD’s best performers, as measured by the population-weighted average of the highest 18 OECD countries.
SA’s productivity (a more entrenched economic problem that is likely to take structural changes to resolve) is 69% lower on that measure. This doesn’t bode well for an employment rate that was already stagnating before the crisis, or for the gaping inequality in South Africa that the OECD encapsulates. The poorest 20% of households earn just 1.7% of total income.
The organisation’s 3.8% South African economic growth forecast for 2021 is more tempered than the above-4% expectations of local economists. The report points out that the solid late-2020 increase in economic activity lost momentum in 2021 due to “a protracted second wave of the virus”. Domestic demand and commodity exports are expected to underpin growth in the second half of the year.
The tailwinds of domestic demand have yet to be seen. But exports that are still expectation-beating continue to outpace imports, providing an essential fillip to the domestic economy. This week’s statistics saw the cumulative surplus for the year-to-date come in at R147.8-billion versus last year’s R4.4-billion deficit for the period. However, imports are expected to pick up as domestic demand increases through to the end of the year, potentially narrowing the surplus from its current levels.
Sanlam Investments economist Arthur Kamp notes that improving terms of trade as a result of a continued improvement in the price of exports relative to imports is a direct boost to income and purchasing power. On the demand side, it often shows up in better than expected consumer spending, he says. If sustained, it may prompt businesses to lift fixed investment with a lag, accompanied by firmer jobs and credit growth — as witnessed during the commodities bounce before the global financial crisis.
Kamp says another positive factor is “the apparent softening of the link between pandemic-related restrictions and economic activity — although, as we know, the link is not entirely broken and specific industries are still being heavily impacted”.
As a result of these local economic dynamics and upward revisions to global growth forecasts on the back of vaccination programmes, a large US fiscal stimulus and the resultant buoyant commodity price environment, Kamp has again upped his South African growth forecast, to 4.5% in 2021.
“As always, forecasts are open to revision,” he notes. “One factor that I believe needs to kick in to assist in maintaining growth is a lift in private sector credit extension. Given that the government continues to absorb a large share of available savings, albeit less than last year, this requires ongoing foreign capital inflows.”
In the short to medium term, the boost that trade flows are giving to our economy is welcome. However, the appetite for South African equities and bonds is not looking quite as favourable. Equity portfolio outflows and anaemic bond market inflows were experienced during May even though global investor risk appetite prevailed as the fears of protracted inflation diminished through the month.
Notwithstanding the unremarkable portfolio flows, the rand continued appreciating and is now 7% stronger than at the beginning of this year, convincingly breaking through the R14 to the dollar level and trading as low as about R13.70 over the past week. The rand’s movements will inevitably have an impact on economic prospects through the rest of the year.
The rand is a key determinant of whether exports will continue growing as strongly as they have been. If the currency remains at its current level, it could reduce appetite for our relatively more expensive goods and services in the global arena.
Annabel Bishop, chief economist at Investec Bank, notes that for now, the rand is getting a particularly strong boost from the demand for our commodity exports, given the current boom in global growth.
She adds: “High commodity prices may keep the rand from depreciating very markedly as a quickening US recovery is positive for global economic recovery, and so for commodity prices.”
But she notes that the rand’s substantial run in strength to date is not expected to be endless.
Old Mutual Multi-Managers investment strategist Izak Odendaal says it would be a “behavioural mistake” to assume that the rand can only strengthen from this point, because the current momentum could well reverse.
Ultimately it comes down to whether the rand is trading close to its fair value or grossly overvalued at these levels.
Says Odendaal: “No one model can give a definitive answer, but the rand seems close to its implied fair value. It has not massively overshot yet, which it tends to do. If the dollar keeps falling, and commodities enjoy further gains, the rand should continue to benefit.”
As the OECD report shows, South Africa still has a long way to go before it fully recovers the ground to the pandemic — and a strong trade account and a robust rand are not sufficient conditions for enough sustained economic growth to enable the all-important fiscal consolidation needed.
The OECD reiterated the structural changes that it believes are needed to see South Africa close the gap between itself and the winning economies. These include:
For now, the threat of a third wave of Covid-19 infections and the challenges standing in the way of achieving real momentum in vaccine roll-outs are stalling the implementation of the Economic Reconstruction and Recovery Plan. Only when we see progress on this will the fate of the domestic economy no longer rely solely on the shifting sands of foreign demand for commodities or the risk appetite of global investors. DM/BM
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