SA macro economic outlook 2021

SA MACRO OUTLOOK 2021: Slow and subdued recovery

By Mpho Molopyane and Siobhan Redford

GDP:

We expect a slow and subdued recovery from the covid-19 crisis due to lower government spending and the impact of the pandemic persisting in the global and domestic economy for longer than we had originally anticipated. In addition, we expect existing electricity constraints to dampen the recovery. As a result, we estimate that GDP growth will average 3.3% in 2021. Our projected growth trajectory implies that real GDP is going to take about four years to recover to pre-covid levels.

The risks to the growth outlook are tilted to the downside. A sluggish global recovery, multiple covid-19 waves that could result in further lockdown measures and mounting fiscal pressures culminating in tight monetary policy could put a further dampener on SA’s recovery, while a quick roll-out of vaccines poses an upside risk to the growth outlook.

South Africa is expected to face repeated waves of rising covid-19 infections, though it is difficult to forecast the exact timing of peaks and the impact that the vaccines will have. This makes it difficult to then anticipate the government’s lockdown approach and thereby the impact on economic activity. We do, however, expect a more targeted approach, with lockdown and social distancing regulations being applied differently to industries and regions based on the health risks that they pose, as played out in some parts of the country over December and January. This targeted approach should result in a less economically restrictive regulatory response compared to the hard lockdown measures implemented in 2Q20 and should thereby limit the negative impact on growth.

We expect electricity supply shortages to remain a binding constraint on growth over the next two years. The lockdown aided in alleviating demand pressures, with Eskom taking the opportunity to increase planned outages to ramp up maintenance of its fleet – which helped raise the EAF (energy availability factor) somewhat. Nonetheless, the average EAF for 2020 declined to about 65% from 67% and 72% in 2019 and 2018, respectively. Therefore, despite the economy projected to have contracted by 7.2% in 2020, the current EAF at 65% points to electricity shortages that will limit the strength of the recovery.

Inflation:

Headline inflation will remain near the lower end of the inflation target range during the first quarter of 2021 as aided by health insurance inflation which is expected to decline to historic lows. During the second quarter, inflation is marked to rise to close to the midpoint of the target as the base effects from fuel prices push transport inflation sharply upwards. Inflation in 2021 is thus expected to be 0.5ppt higher, at 3.8%, than in 2020.

Monetary policy:

The SARB cut the repo rate by 3.0ppt during 2020, largely in response to the economic fallout from covid-19. The MPC kept rates on hold at its first meeting of 2021, and we expect it to keep interest rates on hold for the rest of 2021.

Fiscal policy: Collections from April 2020 – December point to a 10.6% y/y decline in total tax revenue for FY20/21, compared to National Treasury’s Medium-Term Budget Policy Statement (MTBPS) estimate of -17.9%, leading to an improvement in the revenue outlook. Meanwhile, main budget expenditure for the year-to-date is also tracking in line with the NT’s expected 6.9% increase for FY20/21. Given the better revenue outlook, the budget deficit for FY20/21 comes out better than the MTBPS estimate. On the tax revenue side, the higher base in FY20/21 bodes well for FY21/22 tax revenue collections. These factors, together with our expenditure outlook, results in a narrower budget deficit for FY21/22. Despite the improvement in the near-term fiscal outlook, issues of debt sustainability continue to linger as the primary balance is projected to remain in deficit, while the interest rate on government debt is expected to remain higher than nominal GDP – implying that the debt-to-GDP trajectory will continue to rise.

Molopyane and Redford are macro economists in Rand Merchant Bank's Markets Research team.