Economic outlook: South Africa’s difficult road to recovery

Published: 5 February 2021

Over the past few years, South Africa has struggled with weak growth, rising unemployment and mounting public debt. Even before the COVID-19 pandemic, recessionary pressures were acute, with the economy in a technical recession, given two consecutive quarters of negative growth in the latter half of 2019. 

COVID-19 worsened the already challeng­ing economic outlook, fur­ther exposing deep structural divides in the economy. With strict lockdown restrictions in place
since end-March 2020, South Africa prioritised its response to the health crisis by aiming to save as many lives as possible. This saw the country face an almost unique situation in its history – economic activity faced a system-wide shock from both supply and demand sides, coming to a complete halt for a number of weeks in the second quarter across many sectors. Real GDP dropped by 51% quarter-on-quarter (seasonally adjusted and annualised) in Q2 of 2020, after a 1.8% quarter-on-quarter (seasonally adjusted and annualised) contraction in Q1.

According to data released by Statistics South Africa, the economy-wide slowdown was most felt in the manufacturing sector – which contracted 74.9% quarter-on-quarter (seasonally adjusted and annual­ised) and made the largest contribution to the overall slowdown. The second-largest contribution stemmed from the trade and accommodation sector, which contracted by 67.6% quarter-on-quarter (sea­sonally adjusted and annualised). Thereafter was the transport sector, down 67.9% quarter-on-quarter (seasonally adjusted and annualised). The agricultural sector was the only one that posted growth, albeit marginal.

Household spending saw a similar slump given curfews and limitations on move­ment, as well as lockdown restrictions on retail, leisure, and travel sectors. The biggest spending knocks were seen in semi-du­rable and durable goods.

Worker layoffs was another adverse result. South Africa’s unemployment rate (nar­row definition) increased to a record high of 30.8% in Q3 2020, after a record total 2.2 million jobs lost between April and June 2020.

While consumers regained some confi­dence in Q3 as parts of the economy opened up, consumer confidence remained in neg­ative territory. Deloitte research in December 2020 showed that South African consumers continue to have concerns about making upcoming payments, are delaying large pur­chases or are worried about losing their job.

Nonetheless, some green shoots were sprouting from the bleak economic land­scape in the second half of the year, confirmed by data releases towards the end of the year. In Q3 2020, the South African economy grew by 66.1% quarter-on-quarter (seasonally adjusted and annualised) – an encouraging sign following the record contraction a few months earlier, although Q4 2020 and Q1 2021 are expected to see flatter growth, particularly with the onset of the second wave of infections and new, although less restrictive, lockdown measures in place since the latter part of December 2020.

Despite this, the economic fallout for 2020 is expected to be severe, with South
Africa’s National Treasury back in October 2020 expecting a real GDP contraction of -7.8% in 2020. More recently published estimates by the South African Reserve Bank (SARB) are somewhat less pessimistic – the bank revised the forecasted growth contraction upward, to -7.1%.

National Treasury’s October-released projections to 2023 fore­cast a rebound in GDP growth of 3.3% in 2021 from the sharp contraction in 2020, with growth
moderating thereafter (1.7% and 1.5% for 2022 and 2023 respectively). The
SARB’s more recent (January 2021) estimates also continue to see a still muted
yet marginally more upbeat growth path for 2021 at 3.6%, moderating to 2.4% in 2022.

Given the magnitude of the expected con­traction in an already-weak economy, the need for concerted action to transition onto a path of economic recovery is urgent. Policy tools, such as the government’s emergency fiscal stimulus and an easier monetary pol­icy stance, are likely to only cushion some of the worst impacts.

Although National Treasury proposed in its Medium-Term Budget Policy Statement (MTBPS) a number of options to stimulate growth, including pro-growth reforms, a shift of moving from consumption-led toward investment-led growth, with the cornerstone being infrastructure investment; a key focus also was the urgent need to maintain fiscal consolidation given the fast-expanding debt-to-GDP ratio and limited fiscal space.

While the proposed growth-supporting measures were aligned to the South African Economic Reconstruction and Recovery Plan released in mid-October 2020, these measures are likely to face a number of challenges in the immediate term, given the second wave of infections and possible third and even fourth waves in the middle to latter part of 2021.

The most immediate challenge now to reviving economic activity in South Africa is the access to, funding and distribution of vaccines. Although globally, vaccine
distribution, a low cost of capital and rising commodity prices are tailwinds to growth, Deloitte’s Global Chief Economist, Dr Ira Kalish; recently emphasised that the path of the pandemic and how it is managed, the vaccine and how it is rolled out, and governments’ responses to this will continue to shape the global economy. Locally, the current uncertainty around the vaccine rollout, but also ongoing weak business and consumer confidence and other structural weaknesses, thus pose some of the biggest risks to the country’s immediate to short-term economic recovery.

Linked to South Africa’s anticipated vaccine rollout is the uncertainty of how this will be funded, given an already-strained fiscus. This is expected to be addressed in the upcoming February 2021 Budget Speech. Funding options are, however, limited to reprioritising or cutting back further on other spending, raising the expenditure ceiling and thus increasing an already high debt-to-GDP ratio, or raising taxes.

Each of these options comes with its own shortcomings. Already, South Africa has been spending R2.1bn per day on borrowing costs – the fastest-growing expenditure item in the medium term, crowding out socio-economic spending. With debt-to-GDP previously expected to peak at 94.6% in 2025-26, additional borrowing could see debt increase to unsustainable levels of above 100% of GDP, and possibly force the country into a debt trap. Government’s ability to reign in rising debt has already been curtailed by a sharp expected contraction in tax revenue due to COVID-19, with wide consensus that raising taxes amidst a shrinking tax base is unlikely to bring in additional tax revenue. Raising taxes would thus be limited to possibly fuel levies or implementing a previously mooted wealth tax. Also, the reduction in spending across departments to reprioritise spending to fund vaccines may adversely affect economic growth and welfare especially for the poorest households—arguably the most severely affected by the consequences of the pandemic—over time.

As the vaccine rollout commences, vital focus areas that will require renewed
emphasis and consolidated efforts from both government and the private sector, will include increasing spending on infrastructure investment, a reduction in wasteful expenditure and corruption, unlocking efficiencies and opportunities presented by the digital economy, as well as a focus on implementation of outlined urgent growth-enhancing structural reforms. Whichever way, scripting the recovery will require a coordinated and proactive approach by all stakeholders to rebuild South Africa’s economy.

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