What Kind of Economy Can We Expect In 2021?

5 February 2021- Last year was characterised by fear and uncertainty, and the deepest global recession of most people’s lifetime. In years gone by, it would have been unthinkable for any of the world’s leading economies to go into ‘lockdown’. Most economies did however actually enter some form of lockdown last year. The uncertainty of this unprecedented event, together with the negative economic impact caused by the social response (lockdowns) has caused much hardship – not only in South Africa but around the world as well.

One positive outcome from 2020 that must be commended is the resilience of the South African people. Unemployment and poverty are large problems in South Africa even during ‘normal’ economic cycles, and have been exacerbated by the impact of the global recession. Yet South Africans have endured.

What can we expect from our local economy?

South Africa does not have any immediate plans to re-enter a Level 5 lockdown and economic conditions are expected to be more conducive to business this year. The South African Reserve Bank (Sarb) predicts that the economy will contract by 7.1% in 2020, down from the 7.8% contraction predicted at the time of the Medium-Term Budget Policy Statement (MTBPS). The International Monetary Fund (IMF) puts the figure at 8%. Sarb and the IMF are currently in agreement in terms of their prediction for 2021; they both expect the SA economy to grow by 3%. This kind of growth is far from what is required to return to pre-Covid economic levels, but it is a step in the right direction.

What can we expect from our fiscus?

As of the time of the MTBPS, South Africa was borrowing approximately R2.1 billion per day. At the same time SA’s debt to GDP ratio was 81.8% and was expected to peak at 95.3% in 2025.

This implies that we can expect government expenditure to exceed government revenue until at least 2025. As with our own personal finances, if you spend more than you have, you increase your debts, and you need to either increase your income, reduce your expenses or both. Reducing expenditure while increasing government revenue is the most effective means of narrowing the fiscal deficit – but the question is where will the additional revenue come from? Finance Minister Tito Mboweni will have a tough task of tabling his budget for 2021 and will be forced into increasing government revenue (either through increased taxes or new taxes) if he is to attain the goal of keeping the debt-to-GDP ratio from continually growing.

What can we expect from the labour market?

At the time of writing the unemployment rate stood at 30.8% (Q3 2020) in comparison to 29.1% in Q3 2019. This figure was largely caused by the lockdown measures imposed on the country, which resulted in large constraints on economic activity. The net result was a decline of approximately 1.7 million jobs between Q3 2019 and Q3 2020. South Africans will be hopeful that the worst is over, however, how long will the path to recovery be? During the global financial crisis of 2008, SA lost approximately one million jobs that took around four years to recover.

Given that at the peak of SA’s job losses (Q2 2020) SA had more than two million fewer jobs than in the previous year – and we are still experiencing reduced forms of lockdown – the pace of the recovery is uncertain.

The following table, an extract from the World Economic Forum’s latest Global Competitiveness Report, provides a snapshot of a few key rankings of SA’s labour force.

SA labour force insights

This information indicates that SA may have a bumpy road to recovering the jobs that have been shed in 2020.

Digital skills, which have taken on greater importance in the ‘new world of work’, are in short supply, as are skilled employees.

The labour market is characterised by mistrust between employers and employees, rigid wage demands and a below-par ratio of pay and productivity.

These conditions all contribute to employers’ hesitancy when replacing staff, as they will need to ensure that the position that they are employing for is sustainable into the future before they hire full-time staff in that position.

What can we expect in terms of inflation?

SA’s inflation rate averaged 3.3% in 2020, the lowest since 2004. This was largely due to constrained demand as a result of the tough economic conditions faced in 2020. Between December 2019 and December 2020, food inflation increased by approximately 6%. A portion of this increase was attributed to panic buying when speculation regarding the availability of goods in shops was rife. Inflation is expected to return to more ‘normal’ levels and is expected to be 4% for 2021. Price stability is critical in these times, and the Sarb should be commended for adjusting the repo rate in a manner that stimulates demand without ‘creating almost free money’ (at very low interest rates) which would have driven inflation upward.

Down, but not out

This article paints a picture of an economy that is down, but not out. Last year was an unprecedented shock to the global economy but a recovery is expected, albeit at a slow rate.

The largest concern to individuals will be the availability of jobs, and the impact of any increased or additional taxes on their personal finance. If the recovery within the formal sector is as slow as expected, then the informal sector, the gig economy and contract work will take on renewed importance until such time that the employer’s confidence reaches a level where they replace lost full-time positions with new full-time positions.

Although 2021 is expected to be a bit easier than 2020, we are not out of the woods yet and need to work towards continuing our gradual, positive recovery. Source (Moneyweb)