South Africa’s recovery is driven by the commodity price boom– but tapering off

SOUTH AFRICA - Forecast 01 Nov 2021 by Iraj Abedian

Households: South African households took a big hit from the Covid-19 pandemic, and domestic demand has expectedly been adversely affected.Even though household consumption expenditure has undergone a relatively fast recovery, downside risks remain.

Unemployment: Unemployment once again reached an all-time high in the second quarter of 2021, while at the same time the number of discouraged work seekers also went up.Job creation remains lackluster despite the country’s strong economic recovery in part due to the poor performance of the more labor-intensive sectors.

Retail sales: The start of the third quarter saw significant decline in retail sales on the back of the civil unrest that rocked South Africa, while more stringent economic lockdowns had further adverse impact on economic activity.

Mining: Bolstered by higher commodity prices, the mining sector’s production has recovered to its pre-pandemic levels. Nonetheless, despite the recent beneficial surge, South African export commodity prices have been softening over the past months. Meanwhile, in a move that could potentially improve investor confidence and therefore investment in the sector, the South African High Court made a ruling that could see a number of previously contested changes to the Mining Charter 2018 scrapped.

The benchmarking and rebasing of South Africa’s national accounts: Statistics South Africa released the benchmarked and rebased national accounts statistics. The key highlight of the exercise is the upward revision of the country’s nominal GDP by an average of 9.6% between 2011 and 2020. However, there wasn’t a significant change to estimated real GDP growth rates.
South Africa’s growth and prospects: Real GDP expanded for the fourth consecutive quarter during Q2 2021. The elevated commodity prices that have played a big role in South Africa’s swift economic recovery have been moderating, while the decelerating rate of recovery globally means less favorable conditions for South Africa’s growth. Nonetheless, these factors did act as tailwinds for South Africa’s growth for the bulk of 2021, with the effects still remaining. At the same time, the country’s vaccine rollout has picked up significantly. We expect the country’s economy to expand by 5.1% in 2021.

Inflation: South Africa’s annual consumer prices accelerated once again in September, and with the higher print marking the fifth consecutive month, the inflation rate was above the mid-point of the Reserve Bank’s inflation target band. Core inflation remains contained.

Interest Rates: Even though the South African Reserve Bank has not changed the benchmark interest rate since its cutting spree in 2020, it has recently communicated its intention to start policy normalization, possibly as early as November 2021. We however expect the Bank to start increasing rates from Q1 2022.

Fiscus: Government revenue has improved markedly. The much-improved revenue performance, although still from a low base, came on the back of robust growth in all tax categories but most especially corporate income tax.

Current account: On the back of stronger export growth due to surging commodity prices and the slow recovery in demand for imported consumer and investment goods, South Africa’s current account recorded its fourth consecutive surplus during Q2 2021. We expect the country’s current account to maintain its surplus in 2021, and come in at around 4.5% of GDP.

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