Blowing on the sparks of life in the economy

The Covid-19 pandemic has stress-tested almost everything we knew and understood about the economy, markets, social life and mobility.

The historic 51% (R520bn) quarterly annualised and seasonally adjusted contraction in the second quarter sent the economy back to the level it was at in the second quarter of 2007, removing 5-million people from the labour force due to the lockdown regulations, and taking with it 2.2-million jobs and R508bn in disposable income.

Since then a recovery has started, albeit one that remains incomplete, possibly for years to come.

Third-quarter growth surprised the market by exceeding expectations, recording 66% annualised and seasonally adjusted. This has catapulted the economy from its second quarter of 2007 level of R2.6-trillion to R2.9-trillion — the level of GDP back in the second quarter of 2013.

In effect, of the R520bn contraction in the second quarter R353bn has been recovered. Of the 5-million people who had fallen out of the labour force, 2.2-million lost jobs on their return to the labour market. On the income side, of the R508bn contraction in disposable income in the second quarter, R431bn has been recovered in the third quarter.

The above figures demonstrate the extent of the economic damage to the economy due to Covid-19. However, not everything that is wrong with the economy is due to the pandemic. The economy was already in crisis before the arrival of Covid-19.

The government’s response this year has been mostly dealing with the Covid-19 impact. Income support to households and corporates was necessary, though the design of support programmes had shortcomings that need to be refined.

Some have criticised the government for the way in which it responded, not because of the policy instruments employed but because of the design of these policies. This highlights the difficulty of making policy in real time without knowing how the economic shock will unfold.

A lot more still needs to be done to address the damaging effect of the pandemic and revive the economy in a manner that will create jobs for the millions of people now out of work.

In a year in which everything that could have gone wrong for the economy did go wrong, sketching the outlook for the next year is difficult.

First, SA has entered a second wave of Covid-19 infections, with infections, hospital admissions and death rates rising.

The festive season and general non-compliance with social-distancing protocols will put the brakes on the economic recovery that started in the third quarter. The Black Friday frenzy of yesteryears was dull by comparison, and this will show up in the fourth-quarter growth statistics. Reports of mass cancellation of holiday accommodation along the Garden Route demonstrate the importance of consumer sentiment as far as their safety is concerned.

Second, the government has won its case against labour on the implementation of the last year of the three-year wage agreement it signed in 2018. This is a great outcome for government finances that will set a benchmark for many labour agreements across the economy in future. It is not necessarily obvious that this will turn out to be a net benefit to the economy should labour embark on protest action. Strikes could disrupt services at a time the state needs to demonstrate ruthless implementation of the economic recovery and reconstruction plan.

Third, the global environment is geared for risk-on trade, with the US dollar weakening, global bond yields falling and emerging market currencies appreciating. Capital is likely to return to emerging markets, which will lift stock markets and provide support for the economic recovery.

However, SA’s participation as a recipient is no longer automatic, as it was in years gone by when the country was investment grade rated. Its participation needs to be proven through the implementation of economic reforms.

The government’s win on the wage agreement is one big demonstration of political will; spectrum allocation in the first quarter of next year should be next, and energy security that looks beyond Eskom should cement the question of political willingness.

The sceptics continue to look for areas where change is not happening and they miss the positives, though slow, that are important.