2021q1

Regional eXplorer (ReX) update – 1st quarter of 2021

IHS Markit is glad to announce the first quarter update for 2021 of Regional eXplorer (ReX) – the South African knowledge base of municipal level insight. Each quarter, data from a vast number of sources are incorporated into the ReX database to provide users with the most up-to-date statistics.

In this newsletter:

South Africa’s GDP continues upward momentum in Q4 2020
Near-term Economic Outlook
Main data releases incorporated in this update

South Africa’s GDP continues upward momentum in Q4 2020

South Africa’s GDP increased 1.5% quarter on quarter (q/q) during the fourth quarter of 2020, after the lifting of coronavirus disease 2019 (COVID-19) pandemic-related lockdown restrictions during the quarter. Overall, the South African economy contracted by 7.0% during 2020.

South Africa’s real GDP increased by 1.5% q/q, or 6.3% q/q annualised, during the fourth quarter of 2020, after a 13.7% q/q rise in the previous quarter. South Africa’s headline GDP fell by 7.0% in 2020.
The sectors that showed the largest contribution to GDP in the fourth quarter included the manufacturing sector (contributing 2.4 percentage points to the q/q annualised growth), followed by the trade, catering and accommodation industry (contributing 1.3 percentage points) and the transport, storage and communication industry (contributing 0.5 percentage point). The only sectors recording q/q annualised contractions in the fourth quarter were the financial and mining sectors.
Demand-side GDP showed a strong rebound in fixed investment spending of 12.1% q/q annualised during the fourth quarter, and a 7.5% q/q annualised increase in household consumption expenditure. “The highest growth rates were seen in semi-durables and non-durables, but the largest contributors to growth were non-durables and services,” the South African statistical service, StatsSA, reported. Fixed investment spending found support from the acquisition of transport equipment, construction works, machinery and other equipment, and residential buildings.
A strong recovery in import demand meant a negative net trade contribution to overall GDP in the fourth quarter of 2020. Furthermore, a drawdown of inventories was a drag on South Africa’s growth performance over the period.

Outlook

The further easing of COVID-19 pandemic-related lockdown restrictions was primarily responsible for the resilience in economic activity during the fourth quarter of 2020. StatsSA reported an impressive 217% q/q annualised increase in expenditure on restaurants and hotels, followed by 20.9% q/q annualised rise in recreation and culture spending and a 20.9% increase in clothing and footwear sales. However, by mid-December 2020, South Africa was at a high in the second wave of COVID-19 cases, prompting the reintroduction of stricter lockdown measures, which included the banning of alcohol sales, beach closures, longer curfew hours, and border closures. The stricter lockdown measures spilled over into the early part of January 2021.
The harsh economic realities stemming from the lockdown measures impelled the South African government to extend employment protection programmes, such as cash payments under the Temporary Employee/Employer Relief Scheme (TERS) for the temporary formal sector unemployed and basic income grant for the informal-sector unemployed until April 2021. The slow rollout of the COVID-19 vaccine programme could spur another flair-up of COVID-19 cases in coming months, with the severity and duration uncertain. The risk of a return of stringent lockdown measures and the extension of social support programmes should not be ruled out in the baseline as a result.
IHS Markit forecasts South Africa’s GDP to recover by 3.3% in 2021. The economy is expected to continue to benefit from the low base of comparison in 2020, a stronger global backdrop, a loose monetary policy stance, and social protection programmes. Risks to the outlook are high, of which the unfolding COVID-19 pandemic, lack of fiscal flexibility, rising unemployment, and higher global oil prices pose significant. The slow implementation of the South African government’s post-COVID-19 economic recovery programme – with a focus on infrastructure development, private-sector participation, filling electricity gaps, and implementing pressing business policy reforms – is also discouraging, but the programme remains essential for a sustainable growth turnaround in the short-term, in IHS Markit’s view. Higher inflation expected from the second quarter onwards leaves limited room for further monetary easing. IHS Markit’s forecast assumes, however, that headline inflation will remain within the 3–6% inflation target range, allowing the South African Reserve Bank (SARB)’s policy rate to remain unchanged for the remainder of the year. The risk to the interest rate outlook is tilted to the upside, especially if headline inflation exceeds current expectations. IHS Markit expects headline inflation to average 4.3% this year.

Near-term Economic Outlook

A slow start to 2021 is expected to be followed by gains in economic activity during the second half of the year.

IHS Markit analysts have revised South Africa’s GDP growth prospect for 2021 upward and now expect GDP to expand by 3.9% during the year. The economy will continue to benefit from resilient global trade flows and commodity prices. The coronavirus disease 2019 (COVID-19) vaccine program is furthermore expected to gain momentum during the second half of 2021 following the successful procurement of COVID-19 vaccines during the second quarter of the year.
Job retention in COVID-19–related vulnerable industries like recreation, entertainment, retail, passenger transport, and tourism are more likely as COVID-19–related government restriction become less plausible. The COVID-19 pandemic had been detrimental for South Africa’s job market with the unemployment rate ending 2020 at 32.5% from 29.1% for the same period in 2019. Although pent-up demand and low interest rates will benefit consumer spending, the rebound is likely to be slow. Job losses combined with higher inflation, lackluster growth in household sector credit extension, and only small gains in real disposable income levels will limit the upward momentum in household spending during the year.

The global backdrop is likely to benefit the South African economy during 2021. Resilient global commodity prices and stronger global trade are likely to prop up exports of goods during 2021. Tourist arrivals to the country could furthermore show stronger gains in the fourth quarter of 2021. Less import congestion due to supply chain disruptions, higher global oil prices, and stronger local demand will increase imports during 2021. A net positive trade contribution to overall GDP growth is assumed for 2021.
Fixed investment is likely to remain depressed during 2021. Structural bottlenecks such as electricity disruptions—expected to continue until at least late-2022—the risk of labor actions owing to higher unemployment and low salary adjustments combined with weak economic growth underline this expectation.

Interest rates likely to remain unchanged during 2021.

IHS Markit analysts have revised the rand exchange rate upward and expect the currency to average ZAR14.85 against the US dollar during 2021 from ZAR14.90/USD1.00 previously. The rand strengthened by 1.4% against the greenback during March 2021 and continued this path during the first half of April, supported by a weaker US dollar, returned interest by foreign participants in South African financial assets, and current account surplus. IHS Markit analysts expect that the rand could weaken during the second half of 2021 as the current account swing back to a deficit position while more US dollar strength is assumed over the period.
In the medium term, price differentials with the rest of the world, movements in commodity prices, the current-account deficit, and the level of international reserves will determine the rand’s level. South Africa has a high import propensity, which with its slow-developing and relatively fragile export markets, should keep external accounts in the red and place downward pressure on the rand. Furthermore, inflation is expected to stay at about 4.5–5.0%, with global inflation about 2.0–2.5%. This leaves the inflation differential at approximately 2.0%, which is the expected rate of depreciation for the South African rand in the longer term. Upside pressures on the rand, which are expected to cushion the currency’s longer-term depreciating bias, include a relatively sustained upswing in foreign investor interest toward emerging markets and upwardly trending commodity prices as global growth gradually improves.
Headline inflation is expected to pick up in 2021. The low base year of comparison and higher global oil prices, combined with rising electricity cost, could push South Africa’s headline inflation back up to 4.5% in 2021—still well within the South African Reserve Bank’s (SARB’s) official inflation target range. Weak economic growth anticipated during the first half of 2021, combined with a favorable medium-term inflation outlook, is likely to keep the policy rate unchanged during 2021. South Africa’s monetary policy will continue to be considered accommodative.
The South African government expects the main budget deficit to fall to an estimated 9.0% of GDP for fiscal year 2021/22 (FY 2021/22) from a downwardly revised 12.3% of GDP in FY 2020/21. This fiscal target will be missed by a small margin and end FY 2021/22 at 9.8% of GDP. The main budget target is contingent upon the successful reduction in the government’s compensation bill. The 2021 national budget allows for a ZAR144.5-billion fall in the wage bill from FY 2021/22 to FY 2023/24 compared with the 2020 national budget estimates, with the biggest cut occurring in FY 2023/24 at ZAR72.0 billion. The debt servicing cost is expected to account for 21% of projected revenue over the 2021–23 period, while public-sector debt as percent of GDP is likely to reach the 100% threshold by 2026. The fastest-growing functions of the 2021 national budget are economic development, of which infrastructure spending received a ZAR93.1-billion allocation. The government’s fiscal targets hinge strongly on the containment of the public-sector wage bill and the limiting of any further financial transfers to embattled state-owned enterprises (SOEs).

Upside potential is dependent on a potential investment rebound.

An aggressive drive by new ruling president Cyril Ramaphosa to secure USD100-billion local and foreign investment in the next five years could be the swing factor in near-term growth prospects. Strong private-sector investor spending could leave South Africa’s growth rate closer to 3.5% in the medium term.
Important binding constraints, including a high dependency on investment-related imports, higher inflation, inadequate infrastructure, and disruptive domestic political and labor market developments, will continue to prevail within the assumed higher private-sector investment scenario.

Main data releases incorporated in the update

2020 data is now available: ReX has been updated with the latest data available from StatsSA (incl. QLFS and GDP), SARB QB, SARS and many more that allowed us to model and incorporate 2020 data on a sub-national level for most modules in ReX for the following modules:

Population
Development
Labour
Income & Expenditure
Economics
International Trade
Tourism

Topics that are heavily dependent on information from the General Household Survey, such as household access to services, has finally been updated to 2019 data. The Health (UHC) indicators, Crime module and Fiscal module will only be updated later the year as they are dependent on data that has not been released yet.

Significant Data Revisions and Review

As mentioned in earlier communication, this release has been delayed providing for additional time to review the current model and allow for the appropriate revisions to be made in light of the pandemic. The Covid-19 pandemic has had significant implication on most variables an many assumptions made in the past needed to be restated to ensure the model still produces accurate results. The most noteworthy changes to the 2020 data found is ReX will be discussed in the following two sections

Economics and Labour

On a national level, the labour statistics in ReX represents the average of the four quarter’s data provided by the Quartey Labour Force Survey provided by StatsSA. Although employment levels are lower in 2020 when compared with 2019, the unemployment levels are higher. The largest change in terms of the labour force status of most people in the working age category has been attributed to an increased in the Not Economically Active segment. This followed a higher unemployment rate of almost 30% on average for the year, as well as a lower absorption rate (40% vs 43%) and participation rate (57% vs 59%).On a provincial level, we saw an increase in average unemployment rates or almost all provinces (except for Mpumalanga) when comparing 2020 with 2019. The largest increase can be seen in Limpopo, followed by the Eastern Cape province.

In terms of economic performance, we see a decline in economic performance across all provinces for 2020 with uneven recoveries for 2021. In 2020, the largest decline in GDP will be experienced by the Northern Cape province while all three the Cape provinces and Gauteng will see the smallest decline of 6.8%. For 2021, the Northern Cape and North-West provinces will see the largest recovery in average annual growth rate compared to the other provinces.