South Africa’s economy is ravaged by the Covid-19 pandemic, but activity is seeing recovery following the early Q2 slump
• South African households: In line with the rest of the economy, South African consumers are under immense pressure on account of years of insipid growth, and as such, domestic demand has been impacted negatively. The expected slump in GNI due to the pandemic, together with the negative impact on household wealth are going to have a materially adverse impact on domestic demand in 2020. Understandably, consumer confidence is at record lows.
• South Africa’s growth: Following another GDP contraction during Q1 2020, there was a deep decline in overall activity during Q2 on account of the hard lockdowns implemented during the quarter. Available high frequency data shows there were steep contractions in mining and manufacturing production in April. Nonetheless, we expect activity to pick up somewhat from Q3 2020 as the economic lockdown eased.
• SA export commodities: The depressed demand amidst the current economic crisis led to a marked decline in the majority of key South African export commodities during the second quarter of 2020. Yet, the gradual rise in the prices of commodities from April to June points to a recovery from their earlier fall, as well as a continual increase in the price of gold.
• Inflation: South Africa’s inflation rate has been the lowest in years. Headline inflation rate remains well below the lower bound of the South African Reserve Bank’s inflation targeting range of 3%-6%. Core inflation too has been trending downwards and also remains relatively low.
• Interest rates: The Reserve Bank has cut the repo rate by a cumulative 300 basis points in 2020. The relatively steep interest rate cuts have been part of government’s package of interventions in tackling the pandemic induced economic crisis in South Africa. With the South African economy likely already in a deep recession and with no fiscal space to speak of, we foresee another interest rate cut by the Bank by at least 25 bps before the end of 2020.
• Fiscus: Presented four months after Budget 2020, Supplementary Budget 2020 showcased the profoundly negative impact the Covid-19 pandemic is having on the fiscus. It is doing this mainly through two channels – the erosion of the tax base as well as the borrowed funds being spent on government’s fiscal response to the crisis.
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