South Africa's economy slumps from bad to worse

18 Sep 2020

Annabel Bishop

Annabel Bishop

Chief Economist | Investec

In contrast, the public health impact of Covid-19 is proving less severe than originally feared

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The lagging economic impact of measures taken by the state to curb the Covid-19 pandemic is clearly visible in wage data for the second quarter of 2020.
 
The number of take-home pay salaries in July recorded by the BankservAfrica Take-home Index (BTPI) was 34.8% down year-on-year. June saw a drop of 21% and May was down 14%. This compares to a year-on-year drop in April of just 1%.
 
The BTPI records the majority of payments from large corporates and a fair number of medium-sized firms that are served by payroll service providers and firm-owned payroll administrators. According to the report, "the recent decrease may not reflect the full impact of salary declines on small firms."

 
The severe lockdown has weakened corporate balance sheets, with many businesses closing permanently or temporarily. Millions of workers were either placed on reduced pay, unpaid leave (furloughed) or even retrenched with a dire, and forward-reaching, impact on household incomes and expenditure.

 
July's data show a worsening trend in payroll activity, and hence unemployment. The alarming drop is a lagging indicator of the magnitude of the economic contraction. GDP in the second quarter dropped by 51% qqsaa (quarter on quarter, seasonally adjusted, annualised).
 
Declining incomes and earnings associated with the economic slump have forced corporates and households to use their savings to service debt and meet costs, including salaries, whilst the vast majority of the indebted have been battling financially, despite low interest rates.
 
Corporates have indicated in a number of surveys from Stats SA through April to June that their ability to survive on reduced to no income was waning each month, that they were using savings to survive and were also increasingly making use of debt holidays and laying off staff.
 
Lower demand for goods and services has dented the turnover of corporates, and in turn their ability to offer employee remuneration concomitant with last year, or indeed at all.
 
Firms, by and large, are still not even operating at pre Covid-19 activity levels. The level of economic activity experienced in Q3.20, and particularly in July, remains below that of Q1.20. 
 
While the impact of the lockdown on the economy was likely underestimated -- and indeed consensus expectations of the contraction in GDP have shifted weaker every month this year since April -- the impact of Covid-19 on the health of the population is proving to be at the low end of countries globally. 

More detail

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You may also be interested in the following updates in September

MPC Update: 17 September

MPC Preview: 16 September

Manufacturing Update: 10 September

GDP Update: 8 September

Electricity update: 3 September

Vehicle Sales Update: 1 September

MPC Update: 17 September

The SARB assesses the risks to the inflationary trajectory to be balanced

MPC Preview: 16 September

Dovish Fed communication would support low rates for longer in SA

Manufacturing Update: 10 September

The decline in manufacturing activity eases further

GDP Update: 8 September

Economy contracts by -51% qqsaa on the severe effects of the economic lockdown

Electricity update: 3 September

Falling availability of electricity weakens the economy’s recovery from lockdown

Vehicle Sales Update: 1 September

New vehicle sales fell by -26.3% y/y in August
SA Rand

Rand breaks through the key resistance level of R17.00/USD

24 August 2020

Rand reaches R17.00/USD, still driven by a weak dollar in relatively thin market conditions, with the Northern Hemisphere August summer vacation effect weighing on markets

The rand has drifted to, then temporarily through, the key resistance level of R17.00/USD this morning: stronger this month instead of weaker as is traditional in the Northern Hemisphere summer. With many market players on vacation in this period, thin trade in prior years often meant higher risk aversion levels.
 
However, this year the directional trend is towards strength for emerging markets in Q3.20, instead of weakness as has been normal. Q3.20 has been underlaid with US dollar weakness on a departure from safe haven assets as markets continue to price in recovery for the global economy, with traders fearful of missing out on this play. 
 
Indeed, market players likely feel that the most severe events this year have already transpired from a risk-off perspective, while the severe shutdowns, and resultant crippling impact to economic activity, has been localised in Q2.20 and by default both Q3.20 and Q4.20 will experience strong recovery. 
 
The rand has battled to convincingly break through the key resistance level of R17.00/USD this morning, reaching R16.98/USD before being rebuffed back above R17.00/USD, and will likely continue to vacillate around R17.00/USD early afternoon.
 
Against the key crosses the domestic currency is at R20.11/EUR and R22.29/GBP, from a close on Friday of  R20.24/EUR and R22.46/GBP, and will likely attempt to pierce R20.00/EUR this week, absent any severe market moving events.
 
Commodity prices have seen substantial strength, also on market belief that the global economic recovery is firmly underway, bolstering the domestic currency, along with the other commodity currencies, a support which is also likely to persist as long as market participants bet on the global recovery play.  
 
While the rand will struggle to cleanly break through R17.00/USD, as it typically does with any major resistance level, it will also, as usual, take its cue from international events, along with the other emerging market currencies. However, it is likely to finally break through R17.00/USD, in the absence of any significant negative global market events. 
 
So far, the average for the rand is R17.01/USD in Q3.20 to date (and R19.76/EUR and R21.88/GBP), with just over half of Q3.20 now complete. As mentioned last week, the dollar has also been weakened by the delay in US senate approved fiscal stimulus extensions. The senate is due to return from  its summer vacation break on 8th September. 
 
The rand could move through R17.00/USD before the end of this month, and begin tracking towards R16.50/USD in the first week of September, but then run into some volatility thereafter. Market risk averse asset sentiment could rise as early as the second week of September on politicking ahead of the US Presidential elections. 

More detail

Read the full report

You may also be interested in the following updates in August

Manufacturing Update: 11 August

Bond Note: 4 August

Rand Note: 4 August

Goverment Finance: 1 August

Covid-19 Note: 1 August

Manufacturing Update: 11 August

Lockdown-related measures have had a devastating effect on manufacturing

Bond Note: 4 August

Investors concerned about a debt default in South Africa

Rand Note: 4 August

The domestic currency is currently in a consolidation phase

Goverment Finance: 1 August

A sharp fall in tax revenue led to a marked budget deficit of R22.3bn in June

Covid-19 Note: 1 August

21% of South Africans lost their income in June
SA Rand

Rand continues to make gains, along with the other commodity currencies 

23 Jul 2020

Commodity currencies bolstered also by USD weakness and the climb in the gold price, along with waning risk aversion as global fiscal measures increase

The rand has continued on its strengthening trend since May, accelerating as market confidence in the recovery of the global economy improved, with commodity prices lifting noticeably on the same, particularly the metals’ price index. The rand is heavily influenced by metals prices, with metals a key component of its exports, and SA in a trade surplus on average this year.
 
Metals prices are up 15.6% y/y (14.0% m/m), and have been accelerating since May (Economist Commodities Price Index), while industrial commodities’ prices returned positive growth against a year ago for the first time this year in July (currently up 10.4% y/y), as has the overall commodities price index at 10.5% y/y (all Economist commodity price indices). 
 
The gold price continues to see a boom, attempting to exceed its all-time high of US$1 921/oz in 2011, driven by the huge scale of QE in the US which has weakened the US dollar. US dollar weakness places upwards pressure on the gold price given the yellow metal’s measure of real value (while US QE increases the supply of dollars).
 
The climb in the gold price has aided the strengthening trend in the rand, with the domestic currency reaching R16.34/USD today, gaining also against the euro and UK pound, of R18.90/EUR and R20.77/GBP respectively. ECB QE is seen to likely weaken the euro, with a massive increase in euros of €1.4trillion planned until the middle 2021.
 
While QE has bolstered portfolio inflows into EM’s, and lifted the gold price and market expectations for global recovery, QE has  historically not necessarily delivered on substantial economic growth (due to its suppressing effect on the appetite for lending from banks), and so commodity currencies, including the rand, are likely to remain volatile as the global recovery proves uneven.
 
That is, the global recovery is likely to be unsynchronised and patchy in nature, causing market sentiment to wax and wane, as data releases recording various sectors and countries’ economic performances do, with commodity prices and currencies, as well as EM currencies, experiencing volatility as a result.  
 
Markets however currently believe a linear global economic recovery is underway, with exuberance also on positive developments for a vaccine against Covid-19, but disappointing economic data, another spike in Covid-19 infections and/or any other event/s perceived to likely disrupt the economic recovery would have a negative effect on EM and commodity currencies. 
 
While the rand could see some further strength from current levels, it has nevertheless been strengthening very rapidly of late, and is in overbought territory, while foreigners have been purchasing SA government bonds, with CPI inflation last recorded at a historical low of 2.1% y/y (May), while the yield on the R2030 is at 9.15%.
 
However, SA’s inflation rate will rise toward 3.0% y/y in the next two prints, while SA’s rapidly deteriorating government finances, resultant credit rating downgrades and SARB bond buying cap will see the rand unlikely to gain over the medium-term. In the short-term, a correction is likely, although the domestic currency may continue to track towards R16.00/USD first. 

More detail

Read the full report here

You may also be interested in the following updates in July

MPC Update: 24 July

Retail Update: 22 July

Business Cycle: 21 July

Tourism Update: 20 July

Mining Update: 15 July

MPC Preview: 15 July

Gold Note: 9 July

GDP Update: 1 July

MPC Update: 24 July

SARB announces a further 25bp cut in the repo rate to 3.50%

Retail Update: 22 July

Retail trade sales plunged by an unprecedented 50.4% y/y in April

Business Cycle: 21 July

April's SARB business cycle indicator shows worst decline ever

Tourism Update: 20 July

Tourist accommodation numbers for April and May reflect dire impact of Covid-19

Mining Update: 15 July

Mining production fell by a further 29.8% y/y in May

MPC Preview: 15 July

Interest rates are likely to remain low this year, while the improving global environment is likely to bring the MPC some cheer

Gold Note: 9 July

Gold price striving for a new all-time high

GDP Update: 1 July

The economy remains in recession
unemployment image

The unemployment rate rose to 30.1% in the first quarter of the year

23 June 2020

South Africa’s unemployment rate rose to 30.1% in the first quarter of 2020, from 29.1% in Q4.19 and is over 2.0% higher than Q1.19’s unemployment figure of 27.6%.

Specifically, there were 306 000 new entrants into the labour force in Q1.20, translating to a 1.3% q/q rise, while the number of individuals essentially employed during the period fell by 0.2% q/q or 38 000, accounting for the quarter’s poor reading. 
 
Additionally, the expanded unemployment rate, (which includes individuals who desire employment regardless of whether they are actively seeking work) increased to 39.7% in Q1.20, from 38.7% in the fourth quarter of 2019, which is a marked 8.8% increase on levels logged during the same period in 2008. This reflects SA’s dismal labour market situation where the chance of finding work is very low, while the costs related to looking for employment are high.
 
Indeed, even prior to the current global financial crisis, bought on by the Covid-19 pandemic, South Africa had one of the highest unemployment rates in the world, with weak economic growth, underpinned by structural inefficiencies and policy uncertainty driving the country’s mounting unemployment crisis. 
 
The unprecedented situation we find ourselves in at the moment will serve to exacerbate the dire domestic unemployment predicament significantly as business closures and cutbacks accelerate. Consequently, we expect the unemployment rate to average in excess of 36.0% over the medium term (2020-2022).

More detail

Read the full report

You may also be interested in the following updates in June

Budget Note: 24 June

Business Cycle: 23 June

Rand Note: 22 June

Covid-19 Note: 19 June

Vehicle sales: 2 June

Budget Note: 24 June

Sharp deterioration in government debt

Business Cycle: 23 June

Leading indicators show GDP was at risk of contracting before Covid-19

Rand Note: 22 June

Rand weighed down by SA's deteriorating fiscal metrics

Covid-19 Note: 19 June

The number of daily deaths are rising in South Africa as the economy increasingly opens up

Vehicle sales: 2 June

Sales of new vehicles continued to plunge in May
business cycle image

Year-on-year GDP at risk of contracting by between 8% and 10%

26 May 2020

With the lengthening of the lockdown (May level 4, June level 3), from April’s virtually total shutdown of level 5, Q2.20 GDP could see a sharp contraction of around -50% qqsaa or worse.

March 2020’s leading business cycle indicator, released today by the Reserve Bank, lifted to 104 from 103.3 in February. The around six-month lead (between the leading indicator and GDP growth) indicates that with Q1.20 at 103.4, down on Q4.19’s 104.0, Q4.20 GDP would be on track to see a contraction.
 
However, the data used was for Q1.20 and does not capture the worsening conditions of the extended lockdown, globally or domestically. With the lengthening of the lockdown (May level 4, June level 3), from April’s virtually total shutdown of level 5, Q2.20 GDP could see a sharp contraction of around -50% qqsaa or worse, while Q3.20 is likely to see less of a rebound than previously anticipated.
 
With the current progression of one month for each level, July and August will see some continued restrictions on economic activity, and the recovery in Q3.20 is likely to be much more subdued than originally thought. Instead of a rebound of 40% qqsaa in Q3.20 it could instead be around 15% qqsaa.
 
Furthermore, it is not certain that the levels will see a linear monthly progression, levels could go up as well as down, while companies themselves are at risk of temporary closures if infections occur.
 
The use of the Q1.20 leading indicator (released today) as a pointer of future business activity has been dramatically diminished by the impact of the Covid-19 crisis.
 
We previously expected economic growth of -4.8% y/y for 2020, but now believe it could come out closer to between -8.0% y/y to -10% y/y, if not worse. Much will however depend on the progression of opening up the economy. The very slow pace so far has driven our worsening forecasts, as has the sheer length of the lockdown to date, which has seen incomes fall (both due to rising unemployment and firms cutting back on staff renumeration versus last year), and demand to collapse.  

More detail

Read the full report

You may also be interested in the following updates in May

Trade Update: 29 May

Oil Note: 28 May

Rand Note: 25 May

Industrial Production: 21 May

MPC Update: 21 May

MPC Update: 19 May

Manufacturing: 19 May

Capacity Utilisation: 13 May

Vehicle Sales: 5 May

Trade Update: 29 May

The trade account registered a sizeable deficit of R35 billion

Oil Note: 28 May

Substantial rise in the Brent crude oil price

Rand Note: 25 May

Rand continues to strengthen as markets are building up optimism

Industrial Production: 21 May

The first two months of Q1.20 saw industrial production contract by -11.6%

MPC Update: 21 May

SARB announces a further 50bp cut in the repo rate to 3.75%

MPC Update: 19 May

Interest rates are likely to remain lower for longer

Manufacturing: 19 May

Manufacturing activity sliding by a further 2.1% y/y

Capacity Utilisation: 13 May

The risk of business failures rises sharply

Vehicle Sales: 5 May

Sales of new vehicles plummeted by 98.4%

About the author

Annabel Bishop

Annabel Bishop

Chief Economist of Investec Ltd

Annabel holds an MCom Cum Laude (Economics and econometrics) and has worked in the macroeconomic, risk, financial market and econometric fields, among others, for around 25 years. Working in the economic field at Investec, Annabel heads up a team, which focusses on the macroeconomic, financial market and global impact on the domestic environment. She authors a wide range of in-house and external articles published both abroad and in South Africa.


PREVIOUS ECONOMIC UPDATES:

You may also be interested in the following updates in April

Credit Ratings: 30 April

Rand Note: 28 April

Covid-19 Note: 22 April

Rand Note: 20 April

Covid-19 Note: 16 April

Rand Note: 14 April

Covid-19 Note: 9 April

MPC Update: 14 April

Rand Note: 7 April

Credit Ratings: 30 April

SA falls further down the rating ladder

Rand Note: 28 April

Rand strength muted despite improving global risk sentiment

Covid-19 Note: 22 April

The R500bn stimulus package announced last night is well targeted

Rand Note: 20 April

Rand weak in the face of WGBI outflows

Covid-19 Note: 16 April

Some small phased opening up of the economy has been approved by government

Rand Note: 14 April

Rand weakens on surprise 100bp rate cut

Covid-19 Note: 9 April

The global recession is increasingly expected to be longer, and more severe

MPC Update: 14 April

SARB announces a further 100bp cut in the repo rate to 4.25%

Rand Note: 7 April

South Africa's fall down the credit rating ladder weakened the rand

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