Recently-announced measures to curb South Africa’s second wave of COVID-19 will probably throw the economic recovery off course, with GDP likely to contract in Q1 if restrictions are extended. We think that the darkening clouds over the recovery will prompt the Reserve Bank to cut interest rates this month.
- Recently-announced measures to curb South Africa’s second wave of COVID-19 will probably throw the economic recovery off course, with GDP likely to contract in Q1 if restrictions are extended. We think that the darkening clouds over the recovery will prompt the Reserve Bank to cut interest rates this month.
- There is little doubt that South Africa is in the midst of a second wave of COVID-19. Daily new cases recently surpassed July’s peak of around 14,000 and there is little sign that the outbreak is levelling off. (See Chart 1.) A new, more infectious virus strain appears to be behind the latest resurgence in cases. More than 1.1 mn people have been infected in total in South Africa, the highest tally in Sub-Saharan Africa.
- South Africa’s government responded by tightening containment measures on 28th December, restricting economic activity. The country moved from lockdown level one to three (out of five), forcing the shutdown of about 20% of the economy. (See our estimates of degrees of openness at each lockdown level here.) The hospitality sector bears the brunt of new curbs, especially under a ban on alcohol sales. A night-time curfew has been extended, and most public gatherings are banned.
- The economic impact of the latest restrictions will, clearly, depend on how long the measures remain in place and whether they will be tightened further. According to official announcements, the curbs will last until at least mid-January. On this basis, we estimate that the tightening of restrictions will shave around 0.5%-pts off GDP. Data capturing visits to retailers and workplaces, as well as public and private transport show that activity dropped back sharply at the end of 2020. (See Chart 2.)
- If the restrictions are extended further into Q1 and even ramped up, the risk of a contraction of GDP in Q1 will mount. This is certainly not out of the question, especially as the widespread distribution of vaccines is not imminent in South Africa.
- After all, the government has not made any advanced purchase agreements with major vaccine manufacturers. And the country’s order through the Covax facility, covering 10% of the population, is unlikely to be shipped before Q2. The only hope is that the authorities can quickly secure supplies of the Johnson & Johnson vaccine given that South Africa is expected to be involved in its production.
- In any case, there are concerns about the efficacy of existing vaccines against the South African virus mutation. Further delays in the country’s vaccination campaign would require containment measures to remain in place for longer, holding back the recovery from the coronavirus crisis and potentially inflicting additional long-term damage on the economy.
- We think that the darkening clouds over the economy will tilt the balance on the Reserve Bank’s MPC towards further monetary loosening. A dovish minority has lingered since the last rate cut in July 2020, pointing to concerns about the weak rebound and subdued inflation. Price pressures remain muted and the strengthening of the rand against the US dollar provides space for monetary easing. We now expect that the repo rate will be lowered from 3.50% to 3.25% later this month.
Chart 1: South Africa Daily New Cases
Chart 2: CE South Africa Covid Mobility Tracker
Sources: CEIC, Capital Economics
Sources: Google, Apple, Capital Economics
Virág Fórizs, Africa Economist, email@example.com