Compiled by: RA Downing, Econdow CC, In association with CMV Group & Perseus VC1
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Economic Developments in the 4th Quarter 2020
- The economy is still in recession with junk investment status
- Although the technical recession (two consecutive quarters of economic decline), has ended, economic activity has severely slowed, caused by insufficient fixed investment, a return to level 3 Covid-19 lockdown towards end of December, and still with relatively low business and investor confidence
- Serious structural and financial adjustments are imperatives for all participants in the economy – even government officials!
- Dire radical external economic interventions as for instance caused by Covid-19, should be avoided – more ideas on radical state interventions will further be regressive steps towards the economic situation, unemployment and the business climate
- The SACCI Business Confidence Index with 2015 = 100, improved to 93.2 in the 4th quarter 2020 from 87.8 in the 3rd quarter 2020. This is a welcome recovery from the dismal 2nd quarter level of 78.1 and was positive compared to 92.5 in the 4th quarter of 2019. The average 86.5 for the BCI in 2020 however was the lowest level since inception of the BCI in 1985.
- In line with the business climate the business environment for SMMEs also ticked up as the GBEi (General Business Environment Index) improved to 87.5 in the 4th quarter of 2020 compared to 81.9 in the 3rd quarter 2020 and the disheartened 75.6 in the 2nd quarter 2020. The 4th quarter is slightly above the 87.2 of the 4th quarter 2019, but well below the 97.0 of the 3rd quarter 2019.
- Notwithstanding that SMMEs find it difficult to overcome the tight economic situation, they exhibit flexibility and tenacity to deal with challenging conditions.
- Weak domestic economic conditions were present on the demand and supply side. Important indicators continued to be below activity levels of a year ago:
Retail sales volumes were down by 2.6% y/y; manufacturing output minus 2.1% y/y; mining output minus 5.1% y/y; new vehicle sales minus 21.5% y/y; electricity generated minus 1.4% y/y; and real value of building plans passed down by 2.1%y/y. - Weak real demand causes consumer (3.4%) and producer (3.5%) inflation to remain low in the 4th quarter 2020.
- Domestic savings shortfall still not supplemented by foreign investment but net sales of bonds and equity by non-residents slow to R10.5 billion in the 4th quarter of 2020 compared to net sales of R97.7 billion in the 3rd quarter of 2019. This was a main reason for the stronger rand in the 4th quarter by 3.2%.
- The foreign trade account (BoP) recorded a surplus in the 4th quarter of 2020 but the foreign services account (Bop) was in the red due to decline in foreign tourists. A surplus of R103 billion on the trade account in the 4th quarter of 2020 assisted the rand and to some extent balanced the difficulty on the services account and capital outflows by non-residents.
- The unemployment rate (discouraged work seekers included) declined to 43.9% in the 4th quarter 2020 from 47.5% in the 2nd quarter of 2020 – still unacceptably high
- Labour wage demands worrying given high unemployment rate and fiscal dilemma.
The Road Ahead
- The IMF adjusted its world economic growth prospects up by 0.3 %-points to 5.5% in 2021 but that of South Africa down by 0.2 %-point to 2.8% in 2021 and 2022 down by a further 0.1 %-point to 1.4%.
- RSA GDP expected to be 5.5% lower in the 4th quarter of 2020 than a year ago, and thus an expected 8% y/y decline for 2020 as a whole
- GDP is likely to grow by 3.7% in 2021 from a decreased 2020 base
- World trade volumes to pick up in 2021 and could enhance export led growth in emerging markets accompanied by higher commodity prices – not good news for crude oil importers
- The anticipated best performing sectors in RSA in 2021 will remain agriculture, business services and personal services. Shortages in energy supply will dampen physical activity in the secondary and mining sectors.
- The Rand to remain volatile and under pressure in 2021 against the major trading and investment currencies
- Monetary policy anticipated to become tighter as inflation tend to rise – interest rates will most probably increase
- Loans and advances to the business sector became tighter and increased by 4% y/y in the 4th quarter 2020 compared to 4.6% y/y in the 3nd quarter 2020 and to 6.7% y/y in the 4th quarter 2019.
Economic recovery slower than anticipated
Tourism – the one sector that battles
Vehicle sales remain leading economic indicator
Rand volatility to continue
Supply base of economy remains vulnerable – struggling energy supply
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
