Over the past three months, waves of COVID-19 infections spread by the Delta variant have had an adverse impact on global economic recovery. This has been aggravated by continued disruptions of global supply chains, which have caused shortages of components critical for manufacturing goods that are in strong demand. However, with increasing vaccinations economic activity is returning to pre-pandemic levels and, while there may be further waves of infection, governments are learning how to manage these without the economic damage that characterised their initial efforts to control the pandemic.
The recovery has been accompanied by a surge in inflation, most notably in the United States, where the August inflation print was 5.3%. Inflation continues to surprise on the upside and central banks are no longer regarding this with their former complaisance. The US Federal Reserve Board has been communicating that it is likely to start tapering its US$120 billion monthly bond-buying programme in November with the aim to end such purchases in the middle of 2022. This will open the way for normalising short-term interest rates, which are currently close to zero. International bond markets are starting to price in an end to the stimulatory monetary policy of the past 18 months.
The Chinese economy has experienced a sudden slowdown, the extent of which has taken markets and the Chinese authorities by surprise. The Communist Party is increasingly asserting control over the country’s market economy to achieve social objectives, such as reducing wealth inequality, and is showing a willingness to accept lower growth to achieve these objectives. Among the immediate causes of the present slowdown are energy shortages and financial problems in the property sector, which accounts for about 30% of the Chinese economy. The slowdown has had a dramatic adverse impact on certain commodity prices, which has important consequences for South Africa.
The South African government responded to the third COVID-19 wave with increased restrictions on mobility, which prevailed until the end of September. Together with the July disturbances in KwaZulu-Natal and Gauteng, this caused a slowdown of economic activity, which in the first six months of the year had recovered strongly. It is estimated by the South African Reserve Bank (SARB) that the destruction and disruption caused by July’s violence reduced GDP by 0.7%. However, the economy is now back on the mend. While China’s slowdown will have an adverse impact on exports, the current account of the balance of payments should remain in surplus into next year, which will help to stabilise the rand. With increasing mobility there has been a notable recovery in tourism and dining out.
In common with other countries, South Africa has experienced a surge in inflation. The August CPI was 4.9%. The SARB’s current policy rate is 3.5%, which is 1% below its inflation target of 4.5% and a negative 1.4% in real terms. This is abnormally low and the SARB is likely to join other central banks in responding to higher inflation by increasing rates. While our fiscal deficit has benefited from higher commodity prices, it is still unsustainably large. The Treasury has indicated that its longer-term planning will assume that the present commodity windfall will not last.