The long and winding road

The road to economic recovery is long and winding.

Following the volatile year for the global and domestic economies in 2020, we expect 2021 to see an improvement, though uneven across economies.

Isaah Mhlanga: Chief Economist at Alexander Forbes

South Africa’s economic recovery depends on several factors, some controllable

and others uncontrollable, with the most important one being the logistics of Covid-19 vaccines.

Which factors will drive the economic recovery this year and beyond?

Covid-19 impact

The extent of Covid-19 infections and related deaths, and government’s lockdown

restrictions has had a massive impact on South Africa. The second wave of Covid-19 infections appears to be moderating with the relaxation from Lockdown Level Three from the third week of February.

However, there is the risk of a third wave of Covid-19 infections in winter which will be a drag on growth should it occur. What will make all the difference is our vaccination programme which includes the ability to procure Covid-19 vaccines, the effective distribution of these vaccines, and wide acceptance thereof. We expect to see the impacts of these factors in the second half of 2022.

Economic costs

There was also a significant economic cost of the lockdown restrictions for businesses and individuals. We expect these costs to continue this year.

Pressure on government in terms of relief

There is pressure on government to extend the temporary employer/employee relief scheme and establish a basic income grant. While this will increase fiscal risk, it is necessary.

We expect better than expected revenue outcomes for the 2020/2021 fiscal year. However, the 2021/2022 fiscal year will likely remain in line within the medium-term budget policy statement (MTBPS) forecasts.

Fiscal risk remains very high, especially beyond 2022.

Accommodative monetary policy

We expect that monetary policy will remain accommodative and will only start normalising in the second half of 2022.

Global trade volumes show signs of a recovery. However, the recent resurgence in Covid-19 infections and lockdowns poses a downside risk to the global economic outlook in the medium term. Global growth is expected to rebound by 5.5% in 2021 from a revised projected contraction of 3.4% in 2020 on expected vaccine-driven strengthening and additional fiscal policy support.

Global activity will remain well below pre-Covid, January 2020, levels. Even with the anticipated recovery in 2021 and 2022, output gaps are not expected to close until after 2022 and inflation is expected to remain subdued.

Issues to consider

South Africa’s long-term growth strategies for the economy after the Covid19 pandemic must consider the following:

• Localising global manufacturing at consumption site through production onshoring;

• The technological leap, which is permanent with huge benefits to economies, but the digital

divide will persist;

• The rise of the home office and the online retail market, resulting in a change in dynamics

in the property market: residential improves but commercial is at risk;

• Reduced regional and international travel for business for multinationals; and

• Africa Free Continental Trade Area will be transformational but has a lot of hurdles to cross,

with the need for an accompanying Africa-wide air transport protocol.

Lebo Thubisi, Head of Manager Research at Alexander Forbes Investments, has detailed key themes that he believes are most likely to play out in 2021 and beyond:

  • Entrenching sustainability and environmental, social and corporate governance (ESG)

Factors. 2021 will certainly be a key year for tackling climate change as world leaders will be

congregating in Glasgow. We are also seeing a regulatory onslaught of global green

finance taxonomies at the same time as National Treasury is working to develop a first

national green finance taxonomy for South Africa. “The Biden presidency will impact global markets with a pro-climate stance, while the shift to renewable energy by the United States of America places pressure on global finance of coals assets,” says Thubisi. He comments that Covid-19 has led to a rethink of diversity and inclusion practices around inequity, gender pay disparity and parental responsibilities. Based on an annual global asset management survey by Willis Towers Watson, 50% of asset managers surveyed increased the number of ethnic minorities and women at senior positions. As Thubisi remarks, change is firmly in the air;

  • The scale game – the rise in consolidation of the asset management industry. The market environment has meant that there has been a quickening of the pace of consolidation in 2020, which Thubisi expects to continue in 2021. This has come as some larger investment managers have used their scale to expand profit margins, while offering products at lower costs. “Many of these firms have done so by investing in new technology to improve performance and efficiency, while freeing resources for more profitable activities,” remarks Thubisi;
  • Monetisation of data analytics. “One can never be sure that all information has been considered. Artificial intelligence can dig deeper and find the ‘invisible relationships’ that exist between data sets,” says Thubisi. He adds that: “Artificial intelligence has no emotions and is totally indifferent to the outcome of the decision. Its task is to suggest the better option with an unbiased view given the stipulated parameters and make accurate predictions. It may also be powered by a predictor which will allow you to get as accurate predictions as possible considering realtime and historical data.” Investment managers are fast embracing the cloud as this tool and advanced analytics enhance cost efficiencies. The cloud also brings in on-demand storage and processing capabilities, resulting in new developments such as advanced analytics to process virtually all kinds of structured and unstructured data to improve decision making.
  • Alternatives revolution – era of diversification. Thubisi agrees with Boston Consulting Group that “the alternative fund industry is going to grow significantly over the next five years. People are going to move away from equities, and investors are going to expand their longevity outlook and invest with a longer time horizon in mind.” He commented that infrastructure investments offer a slew of opportunities from which investors can benefit while supporting small investees in developing economies. “Emerging market populations already make up 65% of the global total and are growing rapidly. This creates considerable demand for the development of infrastructure which must be met sustainably.”

As the road out of lockdown opens, South Africans are turning their strategic focus to how to

compete in the much-changed marketplace emerging from the crisis. “Global growth is set to improve but will remain constrained until population immunity is achieved, and South Africa’s growth will rebound from a low base but normalise around 2%. Certainty on land expropriation removes a threat to confidence and there is value in South African asset classes driven by a weakening US dollar cycle that favours emerging markets.

Isaah Mhlanga is the Chief Economist at Alexander Forbes.