[print-me printstyle="pom-small-black"]
April 22, 2021

More household spending needed for a
sustained economic recovery – 22 April 2021

A great leap forward is expected once South Africa’s COVID-19 vaccination programme is rolled out in a meaningful way.

The International Monetary Fund (IMF) recently revised its projections for economic output in 2021 upwards. Global growth is now projected at 6% (January 2021 projection 5.5%) and South Africa’s economic growth is now projected at 3.1% for 2021 (versus 2.8% in January 2021).

In South Africa, this could be attributed to the impact of lower interest rates, a strong recovery in commodity prices and robust growth in the export of manufactured goods (i.e. motor vehicles). Motor vehicles are South Africa’s third biggest export item after precious metals, ore and slag (iron and manganese ore).

Initially, the projected recovery in the local GDP rate to 3.1% in 2021 is likely to be export-led, with a domestic economic recovery perhaps being more modest. Growth in a domestic economy without a meaningful improvement in consumption expenditure is difficult to imagine.

Consumption expenditure growth depends on government expenditure and private sector consumption expenditure.

Government consumption expenditure has doubled in proportion to private sector consumption expenditure since 1960. The latter, as a percentage of South Africa’s gross domestic product, has remained constant since 1960.

The austerity measures contained in the Minister of Finance’s Budget Speech in February 2021 lead one to believe that government consumption expenditure is not likely to expand as buoyantly as in the past. Announcements by the President and the Minister of Finance indicate that Government is shifting emphasis from consumption to investment, which is expected to lead to more sustainable long-term growth. Some direct investments have been announced (e.g. Ford Motor Company’s R50 billion, Sibanye-Stillwater’s R6.8 billion, Kumba’s R3.6 billion). Greater policy certainty from Government will support an expansion in foreign direct investment in South Africa.

Private consumption expenditure on non-durable goods (e.g. food and clothing) and services has held up relative well despite greater unemployment and has reached pre-COVID levels (0% year on year to December 2020 and -1.1% y-o-y to December 2020, respectively). The R350 per month social relief grant probably supported private consumption expenditure on non-durable goods and services during the COVID contraction. Private consumption expenditure on durable goods (e.g. motor vehicles) has recovered and is expected to have reached pre-COVID levels in early 2021 (-3.1% y-o-y to December 2020). Private consumption expenditure on semi-durable goods (e.g. large home appliances) suffered the most during the COVID contraction and requires more time to recover to pre-COVID levels (-14.6% y-o-y to December 2020).



For consumption expenditure to improve beyond the recovery to pre-COVID levels, greater employment numbers and/or higher salaries are required to transfer money to consumers, who in turn will spend their greater wealth. Greater access to secured and unsecured credit may also contribute to improved consumption expenditure. Shares that will benefit from improved consumption expenditure include retailers and banks.

South Africa’s official unemployment rate as at December 2020 was 30.8% (29.1% in 2019), or 7.2 million workers. Including discouraged job seekers, unemployment was 42.6% at December 2020 (38.7% in 2019), or 11.1 million workers. The economic sector that that has suffered the most in terms of job losses is accommodation, tourism and leisure. To December 2020, tourism accommodation was down 30% y-o-y and foreign arrivals were down 75%.

These sectors can expect a meaningful recovery once progress is made with the COVID-19 vaccination programme. The programme is therefore expected to have an impact on the conditions required for growth to consumption expenditure.

How is it possible for the FTSE/JSE All Share Index to rise despite sluggish economic growth?

The correlation between year-on-year growth in GDP and the All Share Index is mildly positive (22%), but casual inspection shows that the All Share Index rises three to five quarters ahead of GDP, in anticipation of growth. These anticipatory increases to the All Share Index are often sharp and sometimes perhaps even excessive. The All Share Index is also driven by global markets, liquidity and other factors that determine the supply and demand of shares, but the main long-term driver of share prices remains economic growth.

In South Africa, short- to medium-term economic growth would likely follow improvements in consumption expenditure, which in turn depend on improved employment, rising wages and growth in credit extension to households.

All these depend on the successful roll-out of South Africa’s COVID-19 vaccination programme and confidence in the anticipation of economic improvement.

We eagerly await a vigorous roll-out of our vaccination programme’s next phases.

Graphs source: IRESS