(By Dr Azar Jammine, Director and Chief Economist Econometrix (Pty) Ltd)
Ironically for many observers, South Africa’s economic performance this year has actually turned out to be somewhat better than had been anticipated earlier in the year. Following the downturn last year associated with the lockdown of the economy around the middle of 2020, with the economy contracting by -6.4%, consensus is now looking for growth to approach 5%.
A number of factors have brought about this surprising resilience.
Firstly, interest rates have remained at levels 30% below those which had prevailed prior to the outbreak of the virus. This has helped to generate significant improvements in the financial health of a middle-class which, although forming a small proportion of the total population, contributes towards the lion’s share of consumption expenditure.
What is frequently overlooked is the fact that around 15% of the population accounts for 85% of what is spent in the economy. Moreover, much of this section of the population was relatively lightly affected by COVID-19. This was unlike the majority poorer sections of society who suffered significant incidents of retrenchment and pay cuts. However, the latter did not contribute to reduced economic activity to the extent perceived initially. Similarly, personal tax revenue and VAT did not suffer to the extent expected because most of the meagre section of the population that pays tax, retained employment and in some cases even benefited from the onset of COVID-19. The fact that many individuals in middle income and executive positions have been able to work from home rather than spend on fuel to get to the office, has also benefited their financial position. Furthermore, reluctance to spend money at restaurants or on holidays and other leisure activities has also resulted in significant savings.
Nonetheless, the most important reason as to why the South African economy has ended up somewhat stronger than anticipated is the fact that global economic activity has been extremely buoyant in 2021. An earlier than anticipated rollout of vaccinations in advanced economies has resulted in a return to some semblance of normalcy and a resumption of expenditure. Household balance sheets have been greatly boosted by enormous and unprecedented fiscal and monetary stimulus. Extraordinarily large relief packages benefited those who may have lost their jobs. In addition, the continuation of interest rates at close to zero levels in most of the world’s leading economies, coupled with the addition of masses of liquidity through bond purchases from financial institutions and corporations, known as quantitative easing, has increased the wealth of many middle income persons and especially of upper income persons.
Equity markets, boosted by the flood of liquidity, have escalated to new all-time highs. From South Africa’s point of view, the benefit has filtered through in the form of sharply higher commodity prices and resultant export revenues for key minerals and agricultural products. The strength of the trade balance also helped to keep the Rand quite strong for much of the year and in so doing contributed towards containing inflation to a range between 3% and 5%. This level of inflation has been well within the 3% to 6% official inflation target and has allowed the Reserve Bank to hold interest rates at their 50 year lows for most of the year, until very recently.
Editor: The SALCOC wishes to thank Dr Jammine for his economic insights this year for these newsletters. We look forward to his contribution into 2022 which will include further insight into impact factors for the economies like the Omicron virus, the headwinds faced by both the global and domestic economies and outlook for the future.