2021 Economic Outlook: Anticipated vaccine rollout lights up an uneven post-pandemic path

Highlights

Stricter lockdown rules are likely to trigger a growth slump in the final quarter of 2020 and the first quarter of 2021 in the European and North American economies. Nevertheless, these regions are likely to emerge stronger as high expected vaccination coverage will allow for greater mobility and higher levels of economic activity.
Pharmaceutical breakthroughs have fed optimism for a faster global snapback, though we still view the road to recovery as uneven and uncertain. The strength of the upturn will be reliant on the success of vaccination campaigns and greater global co-operation to guarantee an efficient distribution of vaccines worldwide.
Continued fiscal support and an ultra-accommodative monetary policy stance are crucial in keeping the economy afloat and will lessen lasting economic damage from the crisis. A premature withdrawal of stimulus could pull the rug out from under the nascent recovery if the private sector cannot pick up the economic growth baton.
Instead of invoking an acceleration in the prices of goods and services, central bank policy decisions have instead driven up asset price inflation, which has worsened trends in inequality. With less equitable growth outcomes emerging in the post-pandemic era, global policy uncertainty will likely remain elevated.
After contracting at an anticipated 8.1% in 2020, growth in South Africa (SA) is expected to increase to a below-consensus 2% in 2021 before slowing to 1.6% in 2022. In our view, a likely rise in bankruptcies, electricity supply constraints, a poor jobs outlook, and material fiscal constraints lower the ceiling on SA’s expected recovery.
The major rating agencies have flagged that fiscal consolidation and the Economic Reconstruction and Recovery Plan face high implementation risk. Further negative rating action can be expected later in 2021 if government fails to arrest the increase in its debt burden through extensive wage bill cuts and capping additional financial support to poorly performing state-owned enterprises (SoEs).
A more favourable terms-of-trade and positive momentum behind global vaccine hopes should support the rand in the interim. Nevertheless, we continue to see a depreciating bias in the local currency in the medium term given SA’s deteriorating macro-fundamentals on a relative emerging market (EM) comparison.
While near term inflation pressures are likely tilted to the downside, we see inflation rising in the medium term from an expected 3.2% in 2020 to 3.9% in 2021 and 4.7% in 2022.
Additional monetary policy easing is less likely from here, unless SA suffers another growth setback induced by a renewed country-wide tightening in lockdown restrictions or if there is another sharp dip in inflation. We project a shift higher in interest rates in the second half of 2021 given the SA Reserve Bank’s (Sarb) warning against the dangers of running negative real interest rates for a protracted period.