Chief economist at the Efficient Group, Dawie Roodt, has published a new research note highlighting how the coronavirus pandemic is likely to impact the local and global economy over the next 10 years.
Roodt describes the pandemic as a ‘multifaceted, nonlinear, shock to the world economy’ and that its repercussions will be felt in a number of ways.
“All this will radically increase the risks of events previously considered of little importance. What characterises the Covid-19 pandemic is its range and the uncertainty of its impact. It will expose the shortcomings of economic models, both short-term and long-term.
“This simply means that we do not know what will happen, and the best course of action is to be prepared for all eventualities.”
Below, he provided an analysis of how various sectors are likely to be impacted and how to prepare.
South Africa and global economies
Roodt said that the current crisis happened at a time when the fiscal policies of most countries were already severely constrained due to previous crises.
“Globally, public sector debt soared in recent years as authorities attempted to stimulate economies while tax receipts collapsed.
“For fiscal policy to stay stimulatory, the deficits to GDP need to keep on rising. This inevitably means that fiscal policy will eventually become more restrictive, exactly at a time that the world needs more fiscal stimulus,” he said.
Roodt said that there will also be more pressure on fiscal policy to spend more on health and on transfers to the poor, as well as support marginal companies.
“In fact, the introduction of minimum assistance, or a basic income grant, is likely to become a permanent fixture of fiscal policy in future. Inevitably that means that the role of the state in future will be further expanded as the state becomes more aware of the (income) needs of its citizen.
Roodt further highlighted the following three key themes for South Africa over the next ten years:
- The South African government has mostly been a destructive force and has caused immense damage to the economy. The fiscus and the State-Owned Enterprises (SOEs) have been decimated, both operationally and financially;
- Any significant economic growth for many years has become increasingly unlikely;
- We can expect more state intervention and more radical policies as our political leaders realise that unemployment and poverty are getting worse.
Tito Mboweni’s supplementary budget on Wednesday (24 June) shows that gross national debt will be close to R4 trillion, or 81.8% of GDP by the end of this fiscal year.
This is compared to an estimate of R3.56 trillion or 65.6% of GDP projected in February. He noted that in the February Budget, it was expected that the global economy would expand by 3.3% in 2020 – now the expectation is that there will be a global contraction of 5.2%.
“This will bring about the broadest collapse in per capita incomes since 1870. Throughout the world, tens of millions of workers have lost their jobs. South African unemployment increased by one percentage point, reaching 30.1% in the first three months of this year,” Mboweni said.
“The South African economy is now expected to contract by 7.2% in 2020. This is the largest contraction in nearly 90 years.”
Real estate and working from home
Roodt said that companies are delaying the return of office workers for as long as possible and may use this opportunity to remodel the office altogether.
While some companies may need additional space to meet social distancing requirements, as a general rule less office space will be required in future, he said.
Roodt said that those that remain will have no choice but to offer more flexible lease terms if they want tenants to stay. He added that the pandemic has also given companies an opportunity to assess their workforce.
“Corporates may realise that many of their staff are adding very little value, leading to many potential jobs lost for the traditional office worker.
“This changing environment will also act as a natural selection in favour of those workers that can adapt and innovate under trying conditions.”
This will see the further entrenchment of flexible hours and work wherever you are, he said.
“This will require a lighter touch by management and will require management to trust their employees more. However, not every home is necessarily set up for work.
“Once workers experience the benefits of working from home, and realise that your colleagues and your boss can be a distraction in an office environment, the home of the future will be designed around the home-office worker.”
Some businesses will struggle
Roodt said that the lockdown has forced many businesses to improve their productivity and discover new ways of doing business and support efficiencies.
However, he warns that certain sectors of the economy are going to struggle for an extended period of time still to come. Businesses like musical and sports events, restaurants, bars, and the tourism industry will be the hardest hit, he said.
“The reason for this is simply that when a lockdown is eased and supply chains are reopened, demand does not automatically return to previous levels.
“Obviously, people will have less money to spend, but people will also be wary of the risk of exposing themselves to the virus when going out, especially for nonessential goods and activities.”
The financial impact of the pandemic means less will be available for investments while new safety protocols will make doing business more expensive, Roodt said.
“Business travel, especially air travel, is likely to become more expensive. Furthermore, more statutory enforced spending and measures on health and “social distancing”, means there is less money available for other investments.
“This will unfortunately have a mostly negative impact on global GDP growth.”
Roodt warned that the pandemic may also lead to ‘the death of the small guy’.
“It was mostly large organisations that succeeded while entire ecologies of smaller restaurants, pubs and shops have suddenly disappeared.”
Roodt said that retail and institutional investors alike are now at a crossroads.
The classic portfolio of 60% stocks and 40% government bonds may have worked for the past few decades because equities and government bonds were typically negatively correlated.
But this double advantage has now turned into a double hazard.
As central banks cut interest rates to zero and below, the yield component bonds have all but disappeared, leaving only potential capital appreciation. With yields at zero or below, there is very little room left for yields to fall even further, he said
“Inevitably investors are forced into equities in search of some capital growth. Under these circumstances, any future financial crisis will leave the world financial markets with no shock absorbers.”
This means that while the past few decades provided wonderful opportunities for investors, the next ten years certainly will not, Roodt said.
“Investors will be forced into stocks, and returns on average of nearly 10% per annum are certainly not on the cards for the next ten years.
“Anybody attempting to squeeze more than 5% out of the financial markets over the next ten years will be forced into risky investments.”
One solution may be to consider alternatives, like lower-rated bonds, Roodt said.
“Perhaps even commodities, while complicated investment strategies may also provide better returns. But the use of bonds to diversify against possible losses in the rest of the portfolio is certainly gone for now.
“Equities is the only serious game in town. But that leaves investors vulnerable to economic growth and the whims of central banks.
“For years now, I have advised investors to diversify a significant portion of their portfolios abroad; my advice remains the same.”