Various countries are starting to return to a semblance of normality. This is being driven by their transition into summer where infections are going to decrease and the reopening of economies following Covid-19 vaccination programmes.
The situation is different in the southern hemisphere, and particularly in South Africa. We are going into our winter season where flu and cold infections increase. As immune systems are compromised, the likelihood of being infected by Covid-19 increases. Additionally, we are only in the early stages of the rollout of our national Covid-19 vaccination programme. This has also being complicated by the recent bout of loadshedding and announcements by Eskom that the possability of more loadshedding during winter is extremely high.
Below is an economic update from Alexander Forbes which focuses on the current situation in South Africa and the rest of the world.
A sharp rise in South Africa’s producer inflation
South Africa’s producer inflation increased by 6.7% y/y in April 2021, from 5.2% y/y in March 2021, and slightly below market expectations of 6.8%. It was the highest producer inflation rate since November 2018, pushed up by prices of coke, petroleum, chemicals, and rubber and plastic products.
This follows the 4.4% y/y upsurge in consumer inflation in April 2021, from 3.2% y/y in March 2021, which came slightly above market expectations of 4.3% and moving closer to the 4.5% midpoint of the South African Reserve Bank’s (SARB) target range of 3-6%. It was the highest inflation rate since February 2020, boosted by prices of transport on the back of the historic plunge in fuel prices wrought by the Covid-19 pandemic. Meanwhile, the core inflation rate rose sharply by 0.5 percentage points to 3.0% y/y in March 2021. The SARB projects inflation to average 4.2%, 4.4% and 4.5% in 2021, 2022 and 2023 respectively.
The South African Reserve Bank’s composite leading index increased in April 2021
The South African Reserve Bank’s composite leading business cycle indicator increased by 1.7% in April 2021 following an upwardly revised 2.8% increase in the prior month, which was the strongest since October 2020. Six out of nine components increased with the largest positive contribution. This was reported in the 12-month percentage change of the composite leading business cycle indicator for South Africa’s major trading-partner countries and an increase in the US dollar-denominated export commodity price index.
The data follows better retail sales, mining and manufacturing production in Q1 2021. The SARB expects GDP to increase by 2.7% in Q1 2021. Improving global manufacturing and stronger commodity prices continue to support the local economy. However, policy uncertainties, continued power shortages, sluggish vaccine rollouts and further waves of Covid-19 infections pose significant risks to the growth outlook.
South Africa’s SACCI business confidence index eased slightly to 94 in March 2021, from 94.1 in the previous month and after reaching a two-year high in January 2021. This marked the lowest reading since November 2020, amid uncertainty over the country’s recovery due to the threat of a third wave of Covid-19 infections and ongoing power shortages.
South Africa’s sovereign credit rating affirmed at BB-
Both the S&P global ratings and Fitch ratings affirmed SA’s sovereign credit rating at BB-, with S&P maintaining a stable outlook, while Fitch kept its outlook on negative. SA is now viewed three notches below investment grade by S&P and Fitch, while Moody’s rating is two notches below investment grade with a negative outlook. The latest ratings suggest that ratings agencies are not fully convinced that the government will be able to successfully carry out its fiscal consolidation plan as well as the country’s recovery strategy. Importantly, there has been little evidence to suggest that government would be able to contain the public sector wage bill over the medium term.
According to Fitch, the following factors are likely to lead towards a further downgrade:
- unsuccessful fiscal consolidation paths and wider public debt- to-GDP ratio over the medium term;
- a weakened economic growth trajectory, which would weigh heavily on the fiscal consolidation drive and increase socio- economic issues.
- large portfolio outflows, which result in exchange rate depreciation, higher inflation and, in turn, higher interest rates;
Meanwhile, the following factors are expected to result in a credit rating upgrade:
- fiscal consolidation drive delivers successful results, which increases the possibility that government will achieve lower debt-to-GDP levels;
- a much stronger economic growth trajectory, which supports the government’s consolidation drive and lowers socio- economic disparities.
On the other hand, S&P noted that if the South African economy recovers at a modest pace, thereby increasing pressure on fiscal financing or external pressures start to stack up, this could result in further credit rating downgrade in the future. However, a better- than-expected economic recovery over the forecast period, which results in improvements in wealth levels and real GDP per capita growth, and subsequently an improvement in government’s debt-to-GDP ratio, is likely to result in a credit rating upgrade.
US jobless claims decreased to new pandemic lows
The US number of jobless claims decreased to 406 000 in the week ending 22 May 2021, the lowest level since March 2020 when the pandemic first hit the US labour market. The labour market continued to show signs of a recovery, supported by the reopening of the economy, stimulus packages that increased the demand for more workers, as well as the robust vaccination programme. The data print was below market expectations of 425 000 as many state governments decided to withdraw from federal unemployment benefit programmes. This follows reports from business owners that it has been more difficult to hire as the unemployment benefits pay more than most minimum wage jobs.
The US economy grew by an annualised 6.4% Q1 2021, matching the advance estimate and disappointing the markets expectations of 6.5%. The expansion follows a 4.3% increase in Q4 2020, with upward revisions to consumer spending and non- residential fixed investment. However, the downward revisions to exports and private inventory investment somewhat offset these gains. The annual personal consumption expenditure (PCE) inflation was revised up to 3.7% from 3.5% in the advance estimate, with core CPI also revised up to 2.5% from 2.3% in the previous estimation. The upward revision was supported by an upsurge in used motor vehicle prices. The fading fiscal stimulus packages and rising coronavirus cases in some parts of the world are likely to weigh heavily on the US economic outlook.
UK car production continues to recover as the economy reopens
The UK car production strongly recovered in April 2021, posting 34 573% y/y, from 46.6% y/y in March 2021. UK factories produced 68 306 cars in April 2021, compared to the mere 197 units a year ago when lockdown restrictions effectively paused manufacturing.
However, the data print was still 3.8% below the April 2019 output and pre-pandemic levels. Year-to-date, the country has produced 374 864 cars, with April’s performance offsetting earlier declines to drive a 17.3% overall increase. Importantly, the print was down by 15.0% compared to the same four-month period in 2019. The sector is expected to continue to recover in the second half of the year, boosted by growing global demand.
Germany’s economic growth revised lower
Germany’s economy contracted by 1.8% in Q1 2021, slightly worse than a preliminary estimate of a 1.7% fall and following a 0.5% growth in Q4 2020. The economy has been negatively impacted by lockdown restrictions that were implemented in the first three months of the year on surging coronavirus cases. Household consumption decreased by 5.4%, and investment in machinery and equipment was down 0.2%. In addition, net external demand contributed negatively to the GDP as imports rose by 3.8% and imports increased by 1.8%. Meanwhile, gross fixed capital formation in construction grew by 1.1% and government spending was 0.2% higher.
Germany’s GfK consumer climate indicator rose to -7 heading into June 2021, from a revised -8.6 in May 2021, disappointing market expectations of -5.2%. The improvement in the indicator was supported by marked recovery in income and business expectations amid the significant decline in coronavirus cases and further progress with vaccinations, which may lead to further easing of lockdown restrictions.
The European Central Bank’s President Christine Lagarde noted that it is too early for the bank to discuss about reducing its €1.85 trillion Pandemic Emergency Purchase Programme (PEPP). The ECB is committed to preserving favourable financing conditions using the PEPP envelope at least until March 2022. The bloc’s economy shrank by 0.6% in Q1 2021, entering a technical recession, as some countries across the region imposed social distancing and lockdown measures to curb the spread of the coronavirus pandemic.