South Africa’s structural vulnerabilities worsen as the Covid-19 pandemic takes a toll on the country’s economy
Summary and Assumptions
• Employment: 2.2 million individuals lost their jobs during the second quarter of 2020 amid strict economic lockdowns to slow the progress of Covid-19 infections. Surveys show improvement in employment prospects in H2 2020 from Q2 2020, but also indicate that overall, they remain low. At the same time, the government is in the process of trimming its public sector wage bill, therefore increases in employment will need to come from the private sector.
• South Africa’s growth: There was a dramatic decline in activity across the South African economy during the second quarter of 2020. This also means that the South African economy has declined for four consecutive quarters starting in H2 2019. Nonetheless, we expect GDP to rebound during Q3 2020, and this is already being confirmed by available high frequency data. Downside risks to growth, however, remain.
• Agriculture: The sector was the only one that grew positively during Q2 2020. It has been benefiting from favorable weather conditions, while foreign demand has been good, and its classification as an essential service during the country’s lockdowns was helpful. The sector’s good performance is likely to continue as the latest estimates point to an overall healthy output in 2020.
• Investment: Although investment has been quite muted, President Ramaphosa’s “Economic Reconstruction and Recovery Plan” is largely centered around investment in infrastructure. Projects in the recovery plan will be prioritized for immediate implementation and will benefit from fast-tracked regulatory processes.
• Business Confidence: Business confidence improved in the third quarter following a significant decline in the second quarter. The markedly better business confidence during the third quarter, together with the fact that the metric has typically had a close relationship with GDP historically, suggests that overall activity improved in the economy during the quarter, with GDP rebounding.
• Inflation: South Africa’s inflation remains low and is currently at the lower bound of the Reserve Bank’s target range. Both demand-pull and cost-push inflation are muted.
• Interest Rates: Amid the global economic downturn, including South Africa’s own economic crisis due to the Covid-19 shock, the Reserve Bank cut interest rates consistently throughout 2020, implementing its last rate cut in July. South Africa’s interest rate cuts were also relatively aggressive compared to many of its emerging market peers.
• Fiscus: The Medium-Term Budget Policy Statement confirmed the fact that South Africa’s fiscus has weakened significantly further since Budget 2020. Debt-to-GDP is rising substantially, but is projected to stabilize at just over 95% in 2025/26.
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