The economic fallout from the coronavirus pandemic is likely to be far worse than originally forecast, both globally and in an SA context.
The effect on jobs varies from country to country, depending on relief measures installed, but there can be little doubt that the net effect will be far fewer jobs everywhere. This is critically important in SA, with the highest persistent rate of unemployment of any country.
There are certain industries that will fare better than others, with some being so badly affected that they might not even return after the pandemic is finished. The response by the SA government to the crisis, mainly by throwing large amounts of money at it, is likely to have a mixed effect.
The SA Reserve Bank recently forecast that the second-quarter contraction in GDP would be likely to be about 32%, with the full year estimated at -7.2%. This is reflected in the latest manufacturing output figures for April 2020, in which output plummeted 49.4%. Worst affected was motor vehicles and transport, where the decline was 98%, followed by metal production at -65%.
Although conditions improved markedly in May with the easing of restrictions from level 5 to level 4 lockdown, May’s figures will still be highly negative on a yearly comparison. June is unlikely to be significantly better.
SA is primarily a consumer-driven economy. Not only are consumers unable to spend due to certain industries being shuttered, but the active consumer base is likely to be severely eroded due to soaring unemployment and the imposition of temporary layoffs. Although the SA government has attempted to mitigate the impact, with initiatives such as the R40bn Temporary Employee/Employer Relief Scheme (TERS), it is often difficult to access unemployment benefits due to user-unfriendly bureaucracy.
If the SA Reserve Bank’s forecasts are accurate, the positive turnaround during quarters three and four will have to be very profound to arrive at a 7% decline in GDP for 2020 as a whole. Current indications are that this may not occur, especially as the country is still stuck in advanced level 3 of lockdown, with consumer activity still strictly curtailed. The resumption of load-shedding in mid-July hasn’t helped, neither has the re-imposition of the alcohol sales and distribution suspension, effective 13 July.
Although sit-down restaurants are permitted at the current level, restrictions attached make for an unpleasant dining experience. Little wonder that consumers are hardly thronging back to restaurants.
Contrast this with the proactive stance of UK chancellor of the exchequer Rishi Sunak, who recently announced emergency measures to stimulate the hospitality industry. During August, on Mondays, Tuesday and Wednesdays, consumers can receive a 50% discount on meals and soft drinks (alcohol excluded) in restaurants and bars up to a maximum of £10 per head. And to further aid the tourist industry, VAT on all hospitality establishments will be slashed from 20% to 5% until January 2021.
The economic effects of the virus are likely to persist for at least the next 12-18 months, even under a best-case scenario in which a vaccine is developed relatively quickly. During that time, a return to pre-Covid-19 conditions is unlikely but certain elements — such as social distancing, the wearing of masks and a reluctance by consumers to venture out into crowded areas for fear of contracting the virus — will remain. Consumer-oriented industries will continue to be depressed.
Sectors to avoid include tourism and hospitality, banking, clothing retail and luxury goods. Although not in the consumer sector, construction is likely to remain severely depressed unless a state infrastructure boom materialises. Even if that happened, the local industry has been so decimated by years of dwindling demand that the slack would probably have to be taken up by foreign construction firms.
Food retailers, especially those with a growing online presence and a decent private label penetration, should do well. A progressively weaker rand will make rand-hedge stocks such as Naspers, Prosus and mining stocks attractive.
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