The SA economy in 2021 - Looking into the crystal ball

The SA economy in 2021 - Looking into the crystal ball

Most South Africans are now understandably keen to see the end of 2020 and are hoping for better times in 2021, after what has been a rollercoaster year for SA's political economy. 'Good riddance' is how one leading commentator put it. Yet this is also a time to look forward. What is likely to be the lay of the land in 2021 and what should be done about it?

It is evident that as the year draws to a close, both the world and SA continue to grapple with the seismic impact on lives and livelihoods of renewed surges in Covid-19. Travel links and supply chains have again been placed under severe strain. Many economies have already been severely damaged this year and global economic links badly disrupted. In addition, social tensions have spiked as countries have tried to manage an unprecedented pandemic, its patent risks and inexorable socioeconomic consequences.

Throughout this process, some countries have done better than others, and there have been winners and losers. Yet serious mistakes have inevitably been made and painful lessons have been learned about a virus that has created enormous challenges for policymakers all over the world. It is clear that, in the face of the recent renewed surges in the pandemic, Covid-19 exit strategies are, more than ever, a complex process of balancing trade-offs, handling fears and maintaining trust ‒ all on the basis of shifting evidence and imperfect information, but with profound economic implications.

As the world moves into year two of the pandemic, there are many unknowns about the future trajectory of the virus. But despite the spike in cases in many parts of the world, how well countries fare post-Covid-19 will still eventually be determined by how quickly their economies and societies recover from their respective lockdowns and by the success or otherwise of the policies they have followed so far. A healthy society and a healthy economy are ultimately interdependent.

Above all, the ability to move beyond Covid-19 depends on how soon vaccines will become generally available. It is indeed a race against time to get effective vaccines distributed throughout the world as rapidly as possible and on an equitable basis.

SA in 2021 – a time for strong nerves

And what have been the implications of Covid-19 for a country like SA? What are the country-specific factors that have influenced the economic outcomes?

In a nutshell, whereas for many other countries the original shock of Covid-19 early in 2020 interrupted a positive growth cycle, the SA economy was already extremely vulnerable when the pandemic hit. SA fell into the small group of emerging economies in particular whose weak economic pre-conditions would be severely tested in exceptional circumstances. "When the tide goes out," prominent financier Warren Buffet once said, "you see who has been swimming naked."

An initial drastic and prolonged lockdown therefore aggravated the very troubling pre conditions, such as recession, unemployment, low business confidence, delivery problems, junk status and corruption, which had been prevalent in SA even before the advent of Covid-19. The economic devastation showed up vividly in high-frequency data and in very negative growth and employment trends as the year progressed. The existing fault lines of unemployment, poverty and inequality in SA were, therefore, simply reinforced by the subsequent developments triggered by Covid-19.

Against this backdrop, the government was not supine on the economic front. Nor was the SARB slow initially in cutting interest rates and avoiding a liquidity crunch. On the public finances side, available fiscal space was already extremely constrained amidst escalating public debt and serious warnings of a looming sovereign debt crisis. Welcome temporary economic support measures (spread over an April economic ‘package’, a June supplementary budget and the October MTBPS) could in any event only partially offset the overall contractionary impact of Covid-19 on the economy.

Economic damage has still been widespread, some of it irreversible. Small businesses have been particularly vulnerable, while business liquidations are now 24% higher than a year ago and about two million jobs were lost earlier this year. In effect, just as SA was running out of time (and money), Covid-19 burst onto the scene and, unsurprisingly, economic uncertainty rose, confidence plummeted and the country’s economic performance deteriorated further as the year unfolded.

However, as the lockdown in SA was progressively eased, high-frequency data in the second half of the year confirmed that, as the economy slowly reopened, a recovery was under way. Business activity steadily clawed its way back to a level of ‘normality’. Both business and consumer confidence gradually recovered. Yet it is likely that GDP growth for 2020 as a whole will still be about -7% to -8% as the negative factors play out and the consolidation of the better economic trends has not yet occurred.

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