Economic forecast and the impact of the lockdown

The way we implemented the lockdown has been unique and therefore uniquely damaging.

Our lockdown did not take into account that supply chains run across multiple products, industries and sectors, so moving from level 5 to level 4 have not really brought about any meaningful economic activity. If sensible changes, such as e-commerce and opening up of whole supply chains across the primary, secondary and tertiary sectors were made and we see, with immediate effect, the changes anticipated in the next few day, we could emerge from this lockdown with some semblance of a functioning economy intact. We need to accept that the consequences are going to be relatively severe and the impact could be prolonged.

We only see the economy gaining some momentum in Q4 this year with a GDP forecast of a 7% contraction and only about 3% growth in 2021, followed by GDP growth receding to below 2% in the outer years. The damage from the Covid crisis will, therefore, be enduring. Companies that faced enormous financial strain in the lockdown will postpone or scrap fixed investment first, so capex will not bounce back in 2021. We see fixed investment contracting by more than 16% this year and a further 1% next year and only recovering from 2022 onwards. Company failures and cost-cutting exercises, such as job losses, scrapping bonuses, etc. will also have an enduring effect. We forecast about 1.6 million job losses and it will take up to three years before employment levels return to pre-crisis levels. We also expect disposable income to decline, in both nominal and real terms and that will take about two years to return to pre-crisis levels.

While this is a very gloomy picture, there is some good news. Inflation is forecast to moderate significantly and will probably hit a low of 1.7% in June, rising to 3% in December, averaging 2.8% this year. Next year, off this low base, it will climb to about 4%. We expect a 100bps cut in interest rates next week Thursday. The worst news is in the value of the Rand, which we think is at its bottom.

We think that structural reforms in the year ahead will probably be fairly superficial and slow. South Africa’s risk has been rerated and our risk premium has increased to a higher level. We will always be a speculative bet as there is too much risk to our fiscal metrics for investors’ liking, so we see the Rand pulling back to around R17.18 to the USD at the end of the year and thereafter depreciating at a far more moderate rate.

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