South Africa’s comeback

After global gross domestic product (GDP) shrunk by 3.5% in 2020 – the worst contraction since World War II – the International Monetary Fund now expects that in 2021 it could be as much as 2% above pre-pandemic levels.

This is a swift turn of events.

And one which wouldn’t have been possible without developed economies, led by the US, blowing their budgets, and central banks assisting by buying government bonds on a scale never seen before. Monetising (gaping) budget deficits also had the effect of driving bond yields to record lows (where they more or less have stayed since). Initially this much fiscal and monetary stimulus helped power a marked rally in global equity prices; after collapsing by 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 re-open and vaccine rollouts gain momentum.

Economic wreckage

With a budget deficit of 7% of GDP and an economy in recession even before the pandemic struck, SA didn’t have the fiscal space to go all out. Eventually, however, after some tax relief, and increased spending on social and welfare measures, medical supplies, SME assistance etc., effective budgetary support still came to a non-negligible 3% - 4% of GDP. Additionally, as inflation tanked in the face of 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 couldn’t escape the full onslaught wrought by the pandemic. At the height of lockdown, household disposable income, which in aggregate hardly ever falls, shrunk as businesses closed down, and many of the remaining ones slashed headcount and pay. Amidst falling consumption and heightened economic uncertainty, fixed investment was cut as well. Risk averse firms, households and banks meant growth in private sector credit extension quickly faltered.

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.

Positive surprises

Looking back, the biggest surprise for us wasn’t 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’s 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.

From recession to rebound

While a domestic rebound was never in doubt, given last year’s low base, various forces have recently conspired to brighten growth prospects even more than expected.

One is the spectacular rally in some of SA’s key export commodity prices, notably PGMs. Boosted by factors like US dollar weakness, rapid growth in China, production difficulties and a renewed focus on the transition to green energy, prices simply skyrocketed from their early 2020 lows. The implication being that last year alone, mining exports ballooned by R100bn. Booming agricultural exports added a further R20bn. As profits of commodity exporters have surged, so companies with mining and agriculture as clients, have benefitted too. The trickle-down effects have been noticeable.

Another force is the surprisingly rapid recovery indisposable income, and related to that, consumer spending.