Economic pressure arising from the third wave of Covid-19 infections in South Africa, combined with the disruptions caused by the civil unrest and looting in early July, could result in a gross domestic product (GDP) contraction for the third quarter, says financial services firm Absa macro-economist Miyelani Malulani.

"These recent shocks experienced in the economy are adding to some of the ongoing disruptions to economic recovery in South Africa."

It was always clear that the combination of the challenge of global Covid-19 variants and the nature of the lockdowns put in place would deliver a big blow to the economy, which is what was seen over the past year, with South Africa having experienced a GDP contraction of 6.4% in 2020.

"This is one of the largest contractions experienced among major economies around the world. Viewed against historical data, the contraction was larger than that experienced during the Great Depression," he says.

However, the decade prior to 2020 also experienced some of the weakest growth, comparable to the low growth experienced during the 1980s, so the pandemic shock occurred in an economy that was in difficult shape.

Further, similar to most part of the world, South Africa is in a recovery phase, but it remains incomplete. GDP levels remain below levels before the pandemic. Recovery is also uneven across different parts of the economy, with a K-shaped recovery.

The parts of the economy geared towards essential services and better links to the external environment, such as the mining and manufacturing sectors, recovered faster while high-contact services, such as restaurant businesses and the hospitality sector, continue to see significant under-performance, says Malulani.

"We are still facing big challenges domestically and the rebound in the South African economy, especially given the ongoing global Covid-19 challenges, will not return the country to pre-Covid-19 levels this year, which will only happen in late [2022]. This is the environment businesses should be planning for," he says.

Additionally, with the low levels of vaccination, it will be difficult to rebuild business confidence, not just of local consumers but also foreign consumers, such as tourism services. These parts of the economy will continue to be challenged by problems.

Further, only about 25% of the adult population is currently vaccinated, which is well below the estimated 69% required for herd immunity. These low levels present the possibility that another variant may generate another wave of infections.

INVESTMENT AND CONFIDENCE
Prior to the global financial crisis, from the middle of 2007 to early 2009, South Africa saw strong investment growth that coincided with high levels of business confidence. After the crisis, confidence in South Africa's economy went down significantly and this resulted in investment shrinking.

"This has important implications for the economy's ability to create jobs. Over the short term, business confidence is not rebounding as quickly as is possible and, from an investment perspective, the near-term story will be about a gradual recovery."

Investor sentiment that the political climate is a risk to doing business has increased over the past decade and it is a clear indication from business that the political and policy environment the country faces is not conducive to doing business, he says.

Additionally, while interest rates and inflation pressures are not expected to be concerning over the short- to medium-term, there remain large fiscal imbalances in South Africa.

About R97-billion in additional tax revenue is expected to be collected owing to the commodity export prices. "However, even in an environment where revenue is over-performing, we can still expect the debt-to-GDP ratio to deteriorate in the years ahead. A lot must still be done to stabilise public finances and this is a risk to the economy in the long term."

"There has been some progress on the national Economic Reconstruction and Recovery Plan, but more needs to be done from a reform perspective to lift business confidence and investments to do a bit better. This is something we must be mindful of in the highly contested political environment facing South Africa."

Further, while growth is forecast to reach 4% this year and 1.8% next year, there remain both up- and down-side risks and businesses must continue to factor in operating in highly uncertain environments, Malulani says.