Nedbank has published a research note looking at the impact of the coronavirus pandemic on the local economy and its expectations for the economy towards the end of 2020.
The group said that unemployment likely ‘spiked’ in the second quarter, with job losses of around 1.8 million, while a modest recovery is anticipated.
However, it warned that any recovery is unlikely to reverse the damage done to the labour market duringlockdown.
“Net job losses of 1.6 million are forecast for calendar 2020. The surge in job losses, coupled with heightened job insecurity, will probably continue to weigh on household sentiment and spending long after the pandemic has been defeated,” it said.
It added that April probably reflects the trough in consumer spending – a month when the country experienced its harshest level 5 lockdown restrictions.
“Since then, high-frequency statistics point to some resilience,” it said.
Taps run dry
While the macro-level may show some resilience, Nedbank said that the impact of Covid-19 and resulting lockdown has affected various parts of the country’s highly fractured society and economy differently.
“For middle- to higher-income earners, secure in their jobs, the lockdown reduced travel costs and the stimulus measures provided a boost to income.”
The 300-bps cut in interest rates reduced debt service costs significantly, freeing up substantial funds for discretionary spending, debt reduction or savings, it said.
In sharp contrast, lower-income groups have been left either unemployed, unable to generate income through informal trade, or have been forced to accept lower pay or unpaid leave, Nedbank said.
“Government’s support measures will help preserve basic living standards for some as long the provisions remain place, but many more will be left without any safety net.
“Once this tap runs dry, low-income households are likely to cut back on spending, which will hurt overall demand, affecting sales in some regions and for certain types of goods and services more than others.”
Nedbank predicts that the boost delivered by sharply lower inflation and interest rates to middle- to higher-income earners will probably dominate in the third quarter.
“Thereafter, the overall negative impact on the economy and earnings prospects, in general, are expected to catch up with all households.
“These forces are expected to translate into a decline in consumer spending of around 3% in calendar 2020,” it said.
The direct hit delivered by lockdown will be visible in all industries in the second quarter, Nedbank said.
Dramatic declines are forecast for most major sectors, except finance, real estate and business services where softer contractions are expected.
Nedbank said the lockdown placed enormous strain on companies’ cashflows, forcing even large firms to cut costs dramatically and secure some form of bridging finance.
“The quickest way to reduce costs to prop up cashflows and restore earnings growth is by trimming capital expenditure,” it said.
“Fixed investment is therefore forecast to implode in the second quarter, registering declines far greater than the alarming drop recorded in the first quarter. A quick recovery also appears unlikely given recessionary conditions in both the local and global markets.
“Most companies will probably sit with ample spare capacity throughout the year. As a result, fixed investment is forecast to shrink by a record 27% in 2020.”
Beyond 2020, Nedbank said that old constraints to any expansionary activity will need to be resolved, starting with electricity supply, but extending to all other economic infrastructure from road, rail, port to ICT capacity.
Significant progress on other structural and policy reforms will also be required to improve business and investor confidence, thereby helping to reduce risk and lowering hurdle rates for new investment projects, it said.
“These include addressing clear legislative and regulatory disincentives, establishing policy certainty and stabilising the country’s public finances.
“A growing public debt burden is not only crowding out the private sector from the capital markets but is also raising the cost of capital through the sovereign risk rating downgrades.”
Nedbank said that government finances will deteriorate dramatically in 2020.
“The Supplementary Budget, presented in June, painted a dismal picture of the country’s finances, with the consolidated budget deficit doubling to 15.7% of GDP in 2020/21 from the already high 6.8% estimated at the time of the 2020 National Budget in February,” it said.
Other concerns include:
- National Treasury expects the economy to contract by 7.2% in 2020 (compared with February’s estimate of 0.9% growth);
- The recession and the Covid-19 tax concessions are estimated to reduce main budget revenue to R1,1 trillion, a massive 21.4% less than in February;
- Main budget expenditure is forecast to rise to R1.8 trillion, 2.4% higher than in February, due to the bailouts offered to state-owned enterprises (SOEs) earlier this year, Covid-19 spending and higher debt service costs;
- Gross government debt is projected to climb to 81.8% of GDP in 2020/21 from February’s projection of 65.6%, before rising to 86% by 2022/23.