Nicky Weimar, Group Chief Economist at Nedbank, highlights the five critical elements that we need to watch out for in 2021.
To watch a recording of this conversation, go to Nedgroup Investments Insights on YouTube.
1. How quickly will the vaccine be rolled out?
There are presently three vaccine options - Moderna, Pfizer and a joint venture between Astra Zeneca and Oxford University. The first two vaccines are very difficult to transport and distribute as they have to be kept at extremely low temperatures. The Astra Zeneca vaccine is cheap, easy to produce, requires only two doses and seems to be effective. There has been huge interest in the vaccine with several orders from around the world with France and the UK starting to roll it out in December. The intention is to vaccinate the most vulnerable members of society by Easter 2021. There is no certainty as to how quickly South Africa will be able to secure vaccines.
Given the second wave of Covid across Europe with more shutdowns, we expect the Eurozone to relapse and GDP to shrink both in the Eurozone and the UK in Q4 2020. The impact on the world economy, which is what matters to us in South Africa won’t be as severe. This is in some way due to the US, who, although they’re experiencing a third wave, have not imposed lockdowns, which is what causes economic damage. Growth in the US has continued although at a slower pace. This is countered by Asia who have the virus under control and have hit record levels of industrial production. They are experiencing capacity constraints, which came through in the latest purchasing managers indices. The fastest growing sector in terms of manufacturing is anything to do with electronics. A faster recovery in 2020 will depend on how quickly we can roll out the vaccine and in South Africa.
2. Will SA experience the dreaded second wave?
For a long time, new infections were stable at around 1500. This started picking up with yesterday’s number at 4000. Our short-term prospects may be impacted if we implement stricter lockdown or containment measures.
3. Signs of global inflationary pressure
Investors seem to be in two groups at the moment. The one group fears inflation and global inflation while the second group, which includes policy makers, central banks and private investors, fears deflation. As a result of the pandemic and the lockdowns, the enormous damage to global economic output and household wealth, we have seen policy makers step in very aggressively in 2020. The US Fed led the way with their response to the virus and the lockdown by slashing interest rates to near zero and printing money, thereby expanding their balance sheets at a very aggressive pace. They were followed by the UK and Japan, the latter who has been stuck in negative interest rates and has undertaken quantitative easing for an extended period of time. All central banks have expanded their balance sheets dramatically and have kept interest rates in low-risk countries near to zero. For a low-risk investment, your return will be a pittance right now. At last count, there were $17 trillion of negative yielding bonds out there, which encourages risk taking. This is what we’re seeing in the world economy. A vaccine and the prospect of a return to normality has improved greatly and investors are looking forward to a much brighter 2021. Risk on has returned and risk appetites have improved dramatically. As a result, the Dollar hit a two and a half year low and investors have returned to cyclical stocks the world over. Investors are also looking to emerging markets and specifically emerging market equities. The assumption is that this rebound will be similar to that of the GFC, but the reality is that money is being printed at an incredible pace, interest rates are very low and we’re sitting with the highest debt levels in advanced countries since the Second World War.
4. How will the world cope with raging ‘public debt’ monsters?
As a result of Covid, most governments in both advanced and emerging economies had to take on additional debt to stimulate their economies and this is now at record highs. Private sector debt is also very high. Normally, this would be supportive of a deflationary environment. However, in this environment, you may see a very strong rebound, capacity constraints in certain areas and in some countries we’re even seeing a surge in production costs, which have been passed on to the consumer. This is the beginnings of inflation, so it’s very difficult to see where the world is going at this point. I think we’ll have subdued inflation in the years to come. The Fed has agreed to keep rates low for as long as it takes to bring unemployment back to its minimum level and employment back to its maximum level, which could only be in 2024.
5. What will happen with the wage battle between the unions and the state?
South Africa’s debt situation is dire. Government’s plan to bring the budget deficit down to around 7% of GDP over the next three years rests entirely on their ability to cut public sector wages. This will be a battle against unions and sadly they are already conceding. Private sector wages are falling and will fall further before they start to improve. The public sector, however, has seen an acceleration in wages. The government recently gave a R29 billion concession to the unions to get out of increasing salaries this year in the form of special payments. This won’t be money wasted if they can get the necessary wage cuts through in the years ahead. This won’t bring the debt burden down but could help to stabilize it at about 95% of GDP. Our gross loan debt in 2020 as a percentage of GDP was around 80%. In 2025, this is expected to be close to 95%, so it’s critical that government acts now. South Africa has experienced the highest increase in its gross debt burden of all emerging markets in 2020 and will be second to Algeria in 2025. We have a very weak fiscal position and are at a situation where our sovereign risk ratings are essentially just above the level where the risk of default is considered very high. If we get downgraded, we will fall into a bucket with Argentina, Venezuela and Ecuador, which will not help our case at all. It’s absolutely critical that the government succeeds in bringing debt under control. The IMF GDP forecast indicates that South Africa’s growth outlook is among the worst in the emerging markets universe at 0.3% for the period 2019 - 2025.