Markets & economy

The impact of COVID-19's second wave

The second wave of the COVID-19 pandemic has interrupted the global recovery following the severe economic contraction experienced during the second quarter of 2020. While in many regions the second wave has had a more adverse health impact than was initially experienced, its economic consequences have been less severe because governments now better understand the collateral damage they caused when they attempted to control the pandemic by shutting down large parts of the economy. The focus is now on promoting prudent social behaviour.

While in coming months the second wave should run its course as did the initial outbreak, a crucial difference this time round will be the roll-out of vaccination programmes, which hopefully will bring the pandemic to an end. Over the next six months vaccinations should create a herd immunity, which will end the spread of the virus in the major economies of the northern hemisphere. Unfortunately this will not be the case in most developing countries, with the notable exception of India, which has a large export-orientated pharmaceutical industry. These countries are at the back of the vaccination queue. This seems to include South Africa, although we are in a better position than most poorer countries because we do have the financial capacity to buy the vaccines we require.

During 2020 China was unique in that it alone ended the year with economic activity at a higher level than where it was 12 months previously. However, the prospects for a strong period of global growth once the pandemic ends are more favourable. The combination of increased fiscal deficits and surplus savings accumulated over the past year will promote increased spending. Extremely low interest rates and massive money creation by central banks are sustaining asset prices and have triggered a global property boom. While emerging markets will face severe public health challenges, their economies will be buoyed by strong exports to the developed world.

While the pandemic continues to decimate certain parts of the South African economy, such as tourism, there are other sectors that are doing very well, notably mining and agriculture. Record commodity prices have boosted the value of South Africa’s exports which, when expressed in US dollars, are now back at the all-time highs experienced early in 2012. The large trade surplus has been an important cause of a strong recovery in the rand exchange rate. The combination of currency strength and stable wages is keeping inflation close to the bottom of the 3% to 6% target range. However, the major challenge facing South Africa remains how to fund a fiscal deficit which in the forthcoming fiscal year will be about 10% of GDP.

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