Speaking at the recent Glacier Investment Summit, Carmen Nel of Matrix Fund Managers pointed out that our current situation is different to the 2009 Global Financial Crisis. “This is not a balance sheet recession,” she said, “but rather a short, sharp supply shock induced by lockdowns. We’re now facing a notable V-shaped recovery.” According to Carmen, this does make it easy to be optimistic about a global recovery. South Africa can also benefit but there are headwinds to take note of and hence the road to sustainability will be bumpy.
One of the key outcomes post COVID is the concern around inflation. Productivity booms due to people working from home have helped keep prices in check. Carmen feels stagflation is overdone. “Growth in SA is expected to slow next year but could be 5.5% to 6% this year, slowing down to 2% or 2.5% next year. Inflation is picking up, but off a low base. Unemployment is falling overall, globally, although South Africa has its challenges in this regard.
Inflation making a comeback – is it temporary?
Issues around ESG (environmental, social governance) and climate change are contributing to inflation pressure. Gas and coal prices are up. “At the same time, there’s a concern that climate change policies may lead to under-investment in the fossil fuel sector at a time when we’re still transitioning,” she said.
Supply chain disruption and fiscal support to households have contributed to inflation. Consumers in lockdown in the US spent their cheques in the goods market – so we saw an uptick there. Increased demand in the face of constrained supply led to higher prices, although this is partially normalising now.
While the impact of higher commodity prices and constrained supply has contributed to higher inflation, we see that in exporting countries (e.g. SA), the surge has led to record terms of trade. SA’s current account balance has moved into a notable surplus.
Another key benefit is that the increase in commodity prices has led to a tax revenue windfall, with SARS collecting an additional R100bn in additional revenue in the prior fiscal year.
The wealth effect
House price recovery in the US has improved and this has boosted the wealth effect for the consumer – which in turn will help consumption. Despite the lockdown, consumers with access to stimulus cheques and good benefits are not in a rush to re-enter the labour market. This has also pushed wage prices up as companies attempt to attract workers.
Locally, a weakened labour market is only exacerbating our already high unemployment rate. SA’s fiscal policy – which has a progressive tax regime and a generous grant system – has gone a long way towards stabilising our socio-economic situation. Despite this, the high cost of COVID has been borne by employees and our economy will take time to recover.
A key policy consequence is seen in the demand for a universal basic income. However, to afford this, government would either need to increase taxes, or build the country’s tax base.
Reform
SA needs reform and an investment drive to lift confidence, and to stabilise the investment rating. Areas of concern include education, primary health care and a national minimum wage. Areas where progress can be seen include the infrastructure fund, the anti-corruption drive and cutting some of the red tape for small and medium enterprises.
The road ahead for SA will not be smooth sailing, but the volatility will create new investment opportunities for those who are alert to them.
