EDITORIAL: Only real reform will bring a rebound
Predictions of growth in 2021 are off a low base and those for the next two years are dire
On the economy, SA will take good news from where it may find it. It was striking that on Tuesday, as Stats SA confirmed that 2020s economic slump was the biggest since records began 75 years ago, the rand gained the most in about two months.
While the seasonally adjusted and annualised 6.3% growth rate in the final three months of 2020 was better than what economists predicted, the rand’s move had more to do with global factors and a pullback from a huge sell-off that had seen it drop to 12-month lows above R15.50/$.
It’s a testament to how grim the situation looked at the height of the lockdown earlier in 2020, when some economists were predicting an economy that would shrink by double digits, that a 7% contraction was in the end greeted with some relief. The bigger question is what SA has to look forward to, and it might not be as positive as the government expects.
According to the Budget Review released in February, the economy will rebound by 3.3% in 2021, followed by an average 1.9% in the following two years. Though the government has admitted that the expected rebound is subject to significant downside risk and economists have said it may be too optimistic, they do highlight how long SA has to go to make up for lost ground.
By coincidence, S&P Global Ratings on the same day released its feedback on finance minister Tito Mboweni’s February budget, expressing scepticism that his debt targets will be met.
While the government has set ambitious cost-cutting measures, including a wage freeze that’s being disputed by public-sector unions, the only long-term solution to SA’s fiscal crisis is boosting its economic growth performance. Even if SA meets its targets, they still make sorry reading when compared to peers such as India, whose GDP may jump about 12% in 2021.
In its assessment S&P was slightly more optimistic than the government in the short term, expecting a 3.6% expansion that it also dismissed as a statistical rebound, then expecting 1% and 2% for the next two years. At these rates, it’s hard to see SA achieving its goal of keeping debt as a percentage of GDP below 100% in the next five years as envisaged in the budget.
The RMB/BER Business Confidence Index (BCI) for the first quarter, released on Wednesday, also painted a less than encouraging picture of the economic recovery, retreating from a two-year high at the end of 2020.
Even that high in the three months to December was misleading in that the measure has been stuck below the 50 level that marks the difference between growth and contraction since 2014, yet more confirmation that Covid-19 merely compounded and didn’t cause the country’s economic crisis. The BCI, RMB said, was in “deep net negative terrain” with the majority of respondents, with sentiment most negative in manufacturing and construction.
“Such underlying dynamics are not reflective of a robust economic upswing. On the contrary, it talks to one that is rooted in a fragile foundation,” said RMB chief economist Ettienne Le Roux in the report. Construction and manufacturing were among the most hard-hit industries in the wake of the Covid outbreak, dropping 20% and 12% respectively.
The violent sell off that dragged the rand down in the wake of concerns about a potential spike in developed markets led by the US is just one reason SA cannot rest on its laurels and think the good fortune seen in the fourth quarter will be repeated. In the end, the government’s fiscal situation was not as gloomy as it might have been, thanks to a spike in the price of commodities.
There is now a real danger that the huge stimulus may be perceived by markets as leading to a tightening of monetary policy that hurts global growth. SA’s vaccination process has stalled and there is now a greater danger of more waves of Covid infections into the winter, leading to more lockdowns.
A deep contraction of 7% in a country that was already battling unsustainable levels of unemployment was nothing to celebrate, to start with. Unless the government pushes on with its stated reform agenda, there’ll be nothing to celebrate tomorrow.
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