What Can We Expect From The Economy In 2021?

Caesar: The Ides of March are come. Soothsayer: Ay Caesar, but not gone. - Shakespeare

Introduction: growth forecasts

Table 1 presents a range of forecasts of South Africa economic growth: three from international organizations, two from South African official sources and four from South African commercial banks.

Table 1: Growth projections, 2021

What lies behind these projections? What are the likely drivers of growth during the year as a whole?

A modest start to 2021

Table 2 presents volume indices for mining, manufacturing and electricity distributed, rebased to January 2020, and a trade volume index constructed from sales in constant prices, tourist accommodation excluded. In all but one case, volumes were lower in January and February 2021 than they had been a year earlier. However, the value of mining production was 26% higher in current prices in February 2021 than it had been a year earlier, driven mainly by rising output and prices for platinum group metals in the intervening period.

Table 2

The Reserve Bank’s coincident and leading indicators

The Reserve Bank publishes three indicators of the business cycle: a leading indicator, a coincident indicator and a lagging indicator. The coincident indicator, reflecting the current state of the business cycle was 102.5 at the end of January 2020, falling to 67.5 in May and rising to 92.5 in January 2021, having remained flat since November, roughly confirming the information in Table 2. The leading indicator is of more interest. It was 103.5 in January 2020, falling to 93.7 in May and rising to 116.8, buoying growth expectations for the year as a whole.

The leading indicator has eleven components. Four of them showed positive developments in February 2021, six negative and no information was available for one[1]. The positive developments outweighed the negative. The four positive contributors (from largest to smallest) were:

Number of building plans approved: Flats, townhouses and houses greater than 80 m²

Job advertisements in the Sunday times (percentage change over 12 months)

Commodity price index for South Africa’s main export commodities

Composite leading business cycle indicator for South Africa’s major trading partners (percentage change over 12 months)

The six negative contributors were (from largest to smallest)

• BER[2] business confidence index
• Real M1[3] (six month smoothed growth rate)
• Interest rate spread (10 year government bonds minus 91-day Treasury bills
• BER average hours worked per factory worker in manufacturing
• BER volume of orders in manufacturing
• Number of new passenger vehicles sold (percentage change over 12 months)

The four positive contributors are considered in more detail.

Construction

Of all the sectors hit by the COVID-19 epidemic, construction has been the slowest to recover, with 2020 Q4 value added down by 15% in current prices from a year earlier. The percentage change in the value (in constant 2015 prices) of residential buildings reported as completed to larger municipalities fell by 22% between February 2020 and February 2021. The value of non-residential buildings fell by 59% and the value of additions and alterations fell by 35%, bringing the drop for all categories to 37%[4].

Under these circumstances, it is not surprising that building plans approved has risen sharply in 2021. The value (in constant 2015 prices) of residential buildings approved was 13% higher in February 2021 than a year earlier, the corresponding increases for non-residential buildings was 40% and for additional and alterations was zero, bringing the increase for all categories to 15%. Low interest rates have probably contributed to the rebound.

Consistently, the FNB annual house price index appreciation for February rose to 4.2% year-on-year, up from 3.9% in January. On a month-to-month basis, however, price growth continues to slow[5]. This tapering may well mean that the year-on-year increase in building plans approved also starts to slow. But value added in construction this year will be well above 2020 level, especially since interest rates are likely to rise only twice, by 25 basis points each, in the second and fourth quarters[6].

Employment

Employment growth is more of a puzzle. One reason is that different sources say different things about the recovery of employment in the second half of 2020[7]. Another is that it is difficult to square increased advertising of jobs with low business confidence and low orders and hours worked in manufacturing. One possible interpretation is that employment recovery has lagged output recovery, with employers waiting until the beginning of 2021 to rehire. This would have created the increase in job advertisements. We shall have to wait and see if employment growth is sustained.

Commodity prices

Table 3 sets out the share of the top four commodities in merchandise exports as well as current dollar price indices for them

Table 3

Table 3 confirms that commodity price developments are expected work in South Africa’s favour in 2021.

Growth in South Africa’s leading trading partners

Table 4 confirms the expectation of rapid economic growth among our five largest trading partners and in the world as a whole.

Table 4

Risks

The outlook is for export-led growth, with increasing value of mining output, supported by a recovery in construction. It is not clear how the volume of mining activity will evolve.

Backward linkages to other sectors of the economy may be limited, especially in light of the negative impact of business confidence and leading indicators for manufacturing. The Bureau for Economics Research consumer confidence index is in negative territory, as it has been since September 2019. It stood at -9 in March 2020, dropped to -33 in June 2020, and recovered to -9 in March 2021.

There are three risks which need to be considered:

1. A third wave of the COVID-19 epidemic. In the second half of April 2019, reported new infections have fluctuated in a narrow range about 1 200 per day, and the percentage of tests with positive results have varied between 4.6% and 4.9%, just below the threshold of 5% for an acceleration of the epidemic. The COVID-19 effective reproduction rate is close to one[8]. All these indicate a condition in which a third wave could break out at any time. Its severity would depend on the number of people already infected, how much immunity is conferred by past infection, and how fast the vaccination programme proceeds. Adrian Gore, CEO of Discovery, estimated in February that more than half of the South African population has been infected[9], implying that actual infections were about twenty times reported infections. If this is so and the associated immunity is widespread, the third wave may be less severe than the second, which itself caused less economic disruption than the initial lockdown.
   
   
2. ESKOM load shedding. At a briefing on 15 March 2021[10], ESKOM reported that there had been 19 days of load shedding during the 73 day period from 1 January to 14 March 2021. It observed that the majority of coal power stations are operating past the middle of their operating life, resulting in high levels of breakdowns. Reliability maintenance and refurbishments are under way to get plant performance back to acceptable levels by late 2021. In the intervening period, there will be an increased risk of load shedding.
   
   
3. Wage negotiations. Although current labour market conditions are not propitious for the unions, strikes may occur, given that employers, both public and private, will strongly resist the sort of wage settlements which have been reached in recent years. Public sector wage negotiations deadlocked on 23 April, following which there is a 21 day conciliation period. Strikes mean lost output. In the public sector, the dispute over the government’s refusal to implement pay increases in 2020/21 fiscal year, will be heard by the Constitutional Court on 24 August. The outcome, as well as the 2021/22 settlement, may add to already great fiscal pressure.

Conclusion

The Reserve Bank’s Monetary Policy Committee statement on 25 March 2021 assessed the risks to its growth projection to be balanced. But the economy is fragile, the distribution of the benefits from growth will be uneven, and the potential growth rate remains low.

Charles Simkins
Head of Research
charles@hsf.org.za

[1] The missing indicator was gross operating surplus as a percentage of gross domestic product