Covid-19 cast the economy adrift, but a less punishing new phase of the pandemic could set it back on track. (Waldo Swiegers/Bloomberg via Getty Images)
The South African economy and businesses have undergone seismic shifts over the last two years.
Now, as the country enters Covid-19’s third year – ushered in by an Omicron-fuelled fourth wave of the pandemic which looks to be less punishing than earlier ones – a return to some sort of normality could be nearer.
A lot can change in two years, especially in the grips of a pandemic. Unpredictable economic swings have upended certain sectors, some of which have been permanently repurposed.
By 2019, the year before President Cyril Ramaphosa announced a near-total lockdown of the economy in response to the virus outbreak, South Africa’s GDP had already been on a low-growth path for about a decade. The pandemic turned a steady descent into a nosedive, causing the economy to shrink by 6.4%.
The shock of the pandemic, and the stringent lockdown measures announced in March 2020, triggered other unprecedented economic events: Business confidence, already stuck in negative territory since the 2008 global financial crisis, hit an all-time low in 2020. A staggering 2.1-million jobs were lost.
‘New normal’
Last year, the economy was put on the road to recovery. In 2021 there was, as the South African Reserve Bank put it, “a healthy bounceback” in the GDP’s annual growth rate.
Growth was buoyed by favourable economic conditions, like sky-high platinum prices. In May 2021, South Africa posted its largest trade surplus on record. The commodities boom supported the domestic currency, which held strong on the back of accommodative monetary policy in advanced economies.
While some sectors floundered, unable to adapt to the “new normal”, others got a new wind.
Two years ago, online retail in South Africa was still finding its feet. As lockdowns forced people indoors, some retailers seized the opportunity to grow their offerings. On-demand grocery delivery service Checkers Sixty60 allowed value retailer Shoprite to further expand its market share. The app grew from covering just eight stores in 2019 to 233 sites, cementing Checkers as a strong competitor to high-end retailer Woolworths.
But global economic recovery has been uneven — and its side-effects have created some unpredictable dilemmas.
The strong bounceback in demand for commodities was met with supply-chain bottlenecks that pushed consumer prices up. In South Africa, the effect of this has been most keenly felt through the pinch of petrol price increases. Fuel prices increased at an annual rate of 34.5% in 2021 and drove domestic inflation up past the Reserve Bank’s 4.5% midpoint target.
Elevated prices, which many central banks agreed would be transitory, became more of a worry for advanced economies, which saw record inflation data towards the end of last year.
Inflation risks
Higher-than-expected inflation in advanced economies weighed on the South African rand. Central banks in the US, the UK and Europe became less hawkish about inflation and felt the itch to raise their interest rates to guard against high prices.
In December, the Bank of England surprised markets by raising rates for the first time since the pandemic struck. The decision came despite the threat posed by surging Covid-19 cases, driven by the Omicron variant.
The Federal Reserve in the US has remained hawkish on tightening its monetary policy, but is expected to raise rates in March.
The South African Reserve Bank pre-empted policymakers in advanced economies by hiking the repo rate, which affects the cost of borrowing, by 25 basis points in November. The move would protect the rand from depreciating amid the scaling-back of accommodative monetary policy in advanced economies. A weaker rand means higher inflation.
But the decision was a controversial one, as the domestic economy, battered by the civil unrest that swept through parts of KwaZulu-Natal and Gauteng last July, is expected to grow slower than previously forecast. In the third quarter of 2021, GDP contracted by 1.5%.
After its last meeting, the Reserve Bank’s monetary policy committee said July’s unrest, the pandemic and ongoing energy supply constraints “are likely to have lasting effects on investor confidence and job creation, impeding recovery in labour-intensive sectors hardest hit by the lockdowns”.
The committee forecast that the economy would grow by 5.2% in 2021, down from a previous forecast of 5.3%.
Meanwhile, there has been no recovery on the jobs front. Also in the third quarter, the unemployment rate rose to 34.9%, the highest level since the start of Statistics South Africa’s quarterly labour force survey in 2008.
South Africa’s deepening unemployment crisis has intensified calls for expanding the country’s social safety net by introducing a universal basic income grant. In the wake of July’s unrest, the national treasury — then led by Tito Mboweni — agreed to reintroduce the R350 social relief of distress grant. The grant is set to run until March this year.
Safety nets
Despite calls to expand social spending, new finance minister Enoch Godongwana was mum on the universal basic income grant proposals during his maiden medium-term budget speech last November. Godongwana is expected to make a call on this issue by his budget speech in February.
The national treasury’s fiscal conservatism has seemingly served some purpose. Last month, Fitch revised South Africa’s credit rating from negative to stable, citing strong economic recovery and “surprisingly strong fiscal performance” in 2021.
Fitch noted that the government left open the possibility of new social spending if revenues outperform, but predicted that a basic income grant is unlikely to materialise given fiscal constraints.
“The pandemic continues to weigh on economic performance and remains a source of downside risk for public finances, but the likelihood of severe negative effects on creditworthiness has declined over the last year, despite the recent emergence of the Omicron variant of Covid-19 and the associated rapid surge in new cases in South Africa,” Fitch said.
“A tightening of containment measures is likely but we assume such measures would be short in duration and targeted, primarily hitting the hospitality sector rather than overall economic activity.”
Omicron’s early disruption to South Africa’s economy, in the form of travel bans imposed on the country, was counteracted by the government’s domestic response to the pandemic. Instead of imposing more stringent lockdown measures during the festive season, like it did in December 2020, the government lifted restrictions, citing lower rates of hospitalisation than in previous waves.
The Omicron effect
With forced lockdowns seemingly out, Omicron may have ushered in a return to normality — changing South Africa’s economic prospects for the better in 2022.
PwC economist Christie Viljoen said: “A month ago, as we were heading into the fourth wave, we were expecting some form of stricter lockdown restrictions, which didn’t happen. Having gone through the December holiday so far, and the fourth wave, without seeing additional restrictions, it almost shows us that in 2022 we are probably going to see a lot less in terms of lockdowns.”
Fewer restrictions is good news for certain sectors, like tourism and hospitality, which have been badly hit by lockdowns, Viljoen noted.
But whatever economic tailwinds come as a result of changing pandemic-related dynamics, it is unlikely this will have an effect on reversing South Africa’s unemployment tailspin. “We’re seeing the economy growing, but we are not seeing employment growing … So I wouldn’t be very enthusiastic about seeing a big jump back in employment this year,” Viljoen said.
“Labour market regulations are not geared towards companies suddenly employing a lot more people. And that’s a long-term issue that was identified before Covid.”
Alexander Forbes chief economist Isaah Mhlanga was reticent about making any prognosis of the economy in 2022 based on Omicron’s effect, saying uncertainty remains.
Continued economic uncertainty means it is unlikely that monetary and fiscal policymakers will be quick to change tack, Mhlanga said.
The national treasury will probably stick, as far as possible, to the path of fiscal consolidation, Mhlanga added. “That position has been affirmed by the change to the credit rating outlook in late December. It shows that this is the right thing to do from a credit point of view and if you continue doing it, you are likely to reap the benefits.”
Godongwana will push back against political calls for a universal basic income grant, Mhlanga said. “But the socioeconomic conditions give politicians some leverage to say, ‘We need some more fiscal spending to help people’ — particularly as we go into the ANC conference and the general elections in 2024. So that pressure is going to increase.”
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