Momentum Investments

The Covid-19 pandemic plunged the world economy into the worst recession experienced in post-war history. However, the World Bank predicts a return to global growth of 5.6% for 2021. This would mark the strongest growth rate in economic activity since 1973 and it would be placed as the strongest paced post-recession recovery in 80 years. Still, it seems that the rate of economic recovery is not evenly spread across the globe. 

This is according to Sanisha Packirisamy, Economist at Momentum Investments, who points out that there is a marked difference in the rate of recovery between developed and emerging economies. “Some advanced economies drew down their fiscal buffers and mobilised significant amounts of public sector funds to combat the negative health and economic impacts of the crisis. In comparison, emerging markets, on average, had limited policy space entering the crisis. As such, they had less funds to deploy to support an economic recovery.”

She adds that highly unequal vaccine coverage has further driven a wedge between expected growth outcomes in advanced economies and their developing counterparts. “In its latest World Economic Outlook Update publication for July 2021, the International Monetary Fund showed that close to 40% of the population in advanced economies have been fully vaccinated. This share drops by more than half when looking at the data for emerging economies.”

Packirisamy clarifies that despite stronger external demand from advanced nations, the expected growth rebound in low-income developing countries will be weighed down by a slow rollout of the vaccine and bleak labour market prospects. Advanced economies, by comparison, are expected to recover to their pre-recession levels quicker, and the amount of spare capacity in these economies is likely to reduce at a faster pace.

Over the recovery period from this latest economic depression, there are likely to be two key differences from previous events such as these. “To start, current account deficits for the so-called fragile five countries are significantly narrower on average. These five countries include South Africa, Brazil, India, Indonesia, and Turkey. According to the Organisation for Economic Cooperation and Development, the average current account deficit for these countries has shrunk from around 4.0% as a share of gross domestic product in 2013 to around three quarters of a percent in 2020, which has significantly reduced gross external financing needs. Next, the flow of external funds into the emerging market composite in recent years has been considerably lower than in the years leading up to the 2013 taper tantrum. If less capital has flowed into emerging markets, it essentially suggests that there is less available to flow out.”

In terms of what this means for South Africa, Packirisamy outlines a few important details. “As lockdown restrictions eased across the globe, consumer demand has increased. This, together with easing bottlenecks in global supply chains, has led to a robust rally in commodity prices. This benefited South Africa’s current account balance, meaning more money is received from foreign countries than what is paid. In our view, a less vulnerable external position helps to offset some of the risks associated with capital outflows in the event of a premature withdrawal of global liquidity.”

In addition, firm commodity prices have resulted in the highest terms of trade on record in South Africa - particularly with the rise observed in gold, coal, and platinum prices earlier in the year.  “These three commodities constitute a large portion of South Africa’s exported commodities. They are seen as key drivers of the terms of trade dynamics playing out in our economy.”

Still, the country has a long way to go before it can fully recover. A calculation by Bloomberg suggests that it is likely to take 13 months for South Africa to reach vaccination coverage for 75% of the population, which is at the lower end of estimates deemed necessary to achieve herd immunity, with some estimates pitched as high as 90%. 

“We expect major developed market central bank rhetoric around average inflation targeting to anchor inflation expectations and prevent pre-emptive action from authorities. Domestically, we believe that despite better than expected revenue growth due to a commodity price windfall and a rebound in economic activity in 2021 from a low base, growth and fiscal risks remain elevated in the medium term,” Packirisamy concludes.