COVID-19 continues to rock the global economy

COVID-19 continues to rock the global economy

Sandy McGregor  - 10 July 2020

It seems that, with a few exceptions, such as the southern United States, in the Northern Hemisphere the COVID-19 pandemic is well past its peak. Lockdowns are ending, and by the end of the northern summer, North-East Asia, Europe and North America should have returned to a degree of economic normality. However, in emerging markets, including South Africa, the health situation continues to deteriorate. While in many of these countries restrictions on doing business have been eased, or were never implemented in the first place, economic recovery will have to wait until the pandemic passes. The great uncertainty is how rapidly the demand for goods and services will recover. Consumers remain cautious and some activities, such as travel and tourism, are unlikely to return to pre-COVID levels until appropriate vaccines have been developed and widespread inoculation programmes have been implemented. Accordingly, while some businesses are recovering rapidly, for others the return to normality could take years.

Central banks and governments have responded to the economic crisis with an unprecedented printing of money and expansion of fiscal deficits. The US Federal Reserve Board has increased its balance sheet from US$4.2tn to US$7.1tn, with promises of more to come. While the immediate prospects for company earnings are poor, much of this newly created money has flowed into asset markets, boosting market indices back towards where they were in February.

In South Africa, the draconian level 5 lockdown has been replaced by a more relaxed level 3, which has allowed most business to resume. In March financial markets were particularly turbulent. The South African Reserve Bank has acted effectively to restore stability and has reduced the repo rate to 3.75%. Inflationary pressures remain benign, with annual consumer price inflation to April only 3%.

Following the announcement of a R500bn rescue programme to ameliorate the damage caused by the economic crisis, the minister of finance tabled a supplementary budget on 24 June. While aggregate spending remains largely unchanged, there has been a significant reallocation of spending to provide poverty relief, protect employment and meet the increased requirements of the health system. The consolidated budget balance, which was a deficit of R330bn in the 2019/2020 fiscal year, is projected to be R762bn in the current year, largely due to an anticipated R304bn reduction in tax collections. Funding this deficit will be a formidable challenge with the gross borrowing requirement now expected to be R777bn.

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