Macro Economic Commentary – June 2020

Author: Morotola Polohane


Any government that wants serious consideration from investors must demonstrate critical awareness and a responsible attitude towards its debt profile and fiscal policy stance. A sustainable debt-to-GDP growth path and prudent government expenditures policies are paramount to overall economic health. As such, there is a time for everything, and when unusual conditions prevail, business-unusual approaches can be more appropriate than the norm to remedy the situation. A global pandemic such as our current experience of the coronavirus disease (COVID-19) is definitely ‘unusual’. Thus, during this period of economic crisis occasioned by the COVID-19, the topmost priority for governments around the world should be ‘how do we kick-start economic recovery?’ rather than ‘how healthy are our debt levels?’.

The pandemic may be unprecedented, but this economic philosophy is not. During the Great Depression of the 1930s, John Maynard Keynes was inspired to formulate his theory of macroeconomics in his 1936 book, The General Theory of Employment, Interest and Money. His macroeconomic principles advocated for governments to play an active role in the economy during recessions and depressions in order to stabilise output over the business cycle. In the current context of COVID-19 induced economic recessions, Keynes’ theories advocate for increased government intervention in the real economy through both monetary and fiscal expansion. An increase in government expenditure injects more money into the economy, thereby expanding demand and pulling the economy out of the woods. On the contrary, restrictive fiscal policy during recessions can prove counter-productive, and spell economic doom in severe cases. The latter scenario is what may befall the South African economy soon.

By opting for debt sustainability over new stimulus injection, the Finance Minister might have moved the economy closer to a debt crisis.

The recent emergency budget tabled by the Minister of Finance to counter the pandemic-induced economic crisis fell below market expectations. The budget is a ‘reshuffling’ of expenditure when what the economy needs is a stimulus to kick-start recovery. By opting for debt sustainability over new stimulus injection, the Finance Minister might have moved the economy closer to a debt crisis. Somewhat paradoxically, while the current plan supposedly conserves fiscal sustainability, it may undermine it by weakening the prospects of recovery. Keynes believed that government spending is key to economic growth, in particular, when consumer spending and investment are lagging.

Treasury further projects that if the current fiscal stance is maintained, …. the chance of recovery before the end of the decade might be unachievable.

The COVID-19 pandemic-induced recession has been a ‘game-changer’ for the country, but not in a positive sense. It necessitated a budgetary spending adjustment to the tune of ZAR 230 billion over the next two years and adopting zero-based budgeting going forward (a principle which government still needs to unpack). Among other things, the budget allocated ZAR 3 billion to recapitalise the Land Bank, which recently defaulted on its debt obligations. National Treasury expects South Africa’s gross domestic product (GDP) to contract by 7.2 per cent in 2020 and expand by 2.6 per cent growth in 2021. The budget deficit is projected to widen by 14.6 per cent (consolidated 15.6 per cent), while the debt-to-GDP ratio is estimated to rise to 81.8 per cent in 2020/2021. Treasury further projects that, if the current fiscal stance is maintained, the debt-to-GDP ratio might reach 140.7 per cent by 2028/2029, and that the chance of recovery before the end of the decade might be unachievable.

This gloomy forecast is what necessitated the budget consolidation and constrained the government’s ability to respond to the damage caused by COVID-19. The consolidation allows budget’s debt-to-GDP ratio to peak at 87 per cent in 2023/2024 and drop to 73 per cent in 2028/2029. However, it could be too soon and too aggressive, thereby undermining economic recovery and increasing the risk of a future debt crisis. The Keynes model, of course, assumes that a government has access to unlimited liquidity, which is ideal for governments with fiat currency (such as the United States) that can sell their debt quickly. This is not the case in South Africa, and may perhaps be a constraint to other economies with similar fiscal constraints around the world.

The economy will have to rely more on structural reforms to kick-start economic recovery. The International Monetary Fund (IMF) has further downgraded South Africa’s growth (twice in two months) and now projects the economy to contract to 8 per cent from negative 5.8 per cent in April; however, the IMF also sees recovery of 3.5 per cent in 2021. GDP has been contracting since the second quarter of 2019 and, in the first quarter of 2020, contracted by 2 per cent (quarter-on-quarter annualised). A massive contraction of 20.5 per cent in fixed investments is worrying in an economy that requires more starter fuel to support falling revenue and stabilise a fiscus in dire straits.


Despite the unprecedented magnitude of fiscal stimulus and accommodative monetary policies seen around the globe in recent months, most central banks are uncertain in their economic outlook. There is a shared lack of optimism among policymakers, a growing sense that the economic recovery may be slower than anticipated. There is clear evidence of low confidence in the near-term trajectory of the global economy, which itself plays a substantial role. Indeed, the colossal unknowns related to COVID-19 complicate the timing, pace, and path of the recovery yet to unfold. Gauging from June’s respective meetings, the European Central bank (ECB), the United States Federal Reserve System (Fed), and the Bank of England are less than confident in the adequacy of their current policy prescriptions and remain ready on the sidelines to deploy ‘whatever it takes’ to resuscitate the ailing economy. Inflation everywhere has been tumbling, and medium-term expectations remain stable. The fiscal and monetary stimuli combined are unlikely to trigger hyperinflation in the short term as money velocity remains severely depressed.

Globally, financial markets are currently on a bull run from March lows, despite the global economy going through one of the worst recessions in history. In its June World Economic Outlook publication, the IMF forecast that the global economy will contract by 4.9 per cent, compared to the 1.9 per cent forecast in April, and to recover to positive 5.9 per cent in 2021. The ‘advanced’ and ‘developing economies’ (includes emerging markets) are expected to contract by 8 per cent and 3 per cent in 2020 and expand to 4.8 per cent and 5.9 per cent in 2021, respectively. It is vital to appreciate the fact that, in a globally integrated financial system, most markets move in tandem, as is the case currently. The extraordinary ‘lockdowns’ implemented to curb the spread of COVID-19 pushed most central banks to create humongous liquidity support and, in some countries, to cut interests rates to historic lows. From the IMF’s perspective, liquidity assistance, multilateral cooperation, including short-term debt relief for developing countries facing crises, are critical for real recovery.


The United States’ (US) economy is officially in recession, as announced by the National Bureau of Economic Research, and this brings to an end the most prolonged period of expansion (128 months) since 1854, beating the 120 months from 1991 to 2001. Unprecedented falls in production, employment, and other indicators were all in line with recessionary triggers. The question remains whether this recession episode will be shorter than previous contractions, given the level of support currently being provided. Some economic data are already appearing less severe than had been forecast given the state at play: overall consumption has improved, consumer confidence has increased, and pending homes sales have risen (beating all consensus estimates). Residential estate markets may be taking advantage of the lower interest rates helping to stabilise demand; however, the high unemployment rate is a lingering concern.

The Fed’s view is to expand monetary policy accommodation if the recovery proves to be sluggish, which implies that the support measures will continue as long as the economy remains in jeopardy. However, Fed Chairman Jerome H. Powell is opposing negative interest rates as a viable option in the policy toolkit, which is also the majority view of the Federal Open Market Committee. Powell is in support of additional fiscal stimulus, describing it as ‘costly but worth it’ during his June address. The extra support measures are critical to protecting the economy against impairment resulting from low productivity growth. Lower productivity could lead to income stagnation. Powell’s particular priority is clear: getting employment back to pre-COVID-19 levels. He insisted, in his semi-annual testimony before lawmakers, that “everything we are doing is to try to get the labour market back to where it was in February of 2020”. Moreover, the Fed will remain on maximum risk on policies, to pursue maximum employment and stable prices.

The US has been witnessing high levels of jobless claims which, historically, are closely correlated with bankruptcy filings. Following the recession that ended in May 2009, the unemployment rate peaked at 12 per cent in 2010, a few months before the peak in bankruptcy filings. In recent months, though, this correlation has been disrupted due to the Fed’s unprecedented response, the Coronavirus Aid, Relief and Economic Security Act (known as the ‘CARES’ Act), and the delay in tax filings. The net effect of these interventions has been a delay in the incidence of bankruptcies and business failures; however, insolvency filings will likely follow soon, and indeed are already doing so. The weekly number of businesses filing for bankruptcies reached an all-time high in the week of June 20th, which is equivalent to the all-time weekly high experienced in the global financial crisis (GFC). The majority of companies filing for bankruptcy year-to-date have been in the consumer discretionary sector (39 per cent) and energy sector (17 per cent). More businesses are expected to file for bankruptcy as more sectors start to feel the secondary effects of employee layoffs and other impacts of COVID-19.


Economic activities have continued to normalise in China since April, albeit at a slow pace. The renewed outbreak of COVID-19 in Beijing may turn out to be more consequential than its localised nature suggests. It remains small so far, and the government’s response has been quick. Authorities’ strategy (of isolated local shutdowns rather than a full stringent lockdown) suggests that the impact may be limited. Nevertheless, the numbers of metro commuters riding to the capital have declined to an average of 40 per cent since the second outbreak, sliding down from the average of around 70 per cent of pre-pandemic levels. The outbreak is detrimental to the consumer economy, which is lagging the recovery in the production side. Until people feel comfortable with infection risks, consumption is likely to suffer, unless business models change. These emerging epidemiological developments in Beijing demonstrate the uncertain possibility (in China and of course all other economies) of a second-wave outbreak, which would delay the return to normal economic activities. The uncertainty itself thus also slows down recovery.

The geopolitical risk arising from the pandemic ‘blame game’ may call for deglobalisation at just the moment when the world should be holding hands and pulling together.

The National People’s Congress abandoned its explicit GDP growth target for 2020 in the face of the severe economic downturn and announced more substantial fiscal support and monetary easing. Financial conditions are easing, and the early June surveys show a remarkable improvement. Property sales in tier-1 cities rose above the pre-pandemic level in the week of June 12th, and there was stronger than expected credit expansion in May.
The labour market is also improving, but the deepening trade tension and global recession are likely to weigh negatively on export-related employment. The US-China phase one trade deal seems to be in trouble as China struggles to meet US import targets. Furthermore, the rising political tension and technology restrictions between these countries may also accelerate decoupling, which may drag down manufacturing and endanger much-needed recovery post-pandemic. The geopolitical risk arising from the pandemic ‘blame game’ may call for deglobalisation at just the moment when the world should be holding hands and pulling together.


The EU (European Union) fiscal stimulus has been a significant buffer against economic shocks, with blanket job retention schemes helping to keep down unemployment rates. The budgetary boost mostly comes from Germany and Italy, while countries like Spain and France still have their stimuli below GFC levels. The latest purchasing managers index trends in the Eurozone showed renewed optimism, with France on an expansion trajectory. France has already lifted its stringent containment measures, and Spain ended its national state of emergency after three months in lockdown and started lifting lockdowns restrictions. There is an expectation that the United Kingdom (UK) will ease lockdown further in July (by reopening restaurants and cinemas); therefore, economic activities should slowly pick up. The UK Prime Minister, Boris Johnson, has promised infrastructure plans with a sense of urgency attached, and Treasury will follow with details of stimulus for the “New Deal” in July – there is hope that this will ensure Britain’s recovery.

Corporates in the EU are over-leveraged and therefore, unlikely to lead the recovery.

Corporates in the EU are over-leveraged and therefore, unlikely to lead the recovery. This places the onus of rebound on consumption increases. Various schemes have been effective in bolstering the demand so far (and stimulus), but there are expectations of these schemes phasing out. The recent equity rally is not sufficient to address the balance sheet of structurally high corporate leverage or pressured leverage ratios (such as debt-to-enterprise values). While this liquidity is delaying the risk of defaults (as in the case of the US described above), EU small and medium-sized enterprises (SMEs) are expecting their access to funds to worsen in the near term (as indicated in a survey by lobby group SME United). Loans not supported by public schemes are too often rejected by banks, or come with higher interest rates. That being said, it is acknowledged that financial availability supported by complicated public schemes comes with administrative burdens (excessive red tape). Further, a deteriorating profit outlook across economic sectors harms access to external finance.

ECB survey data show that SMEs’ profit fell by double-digit rates in the Euro-area, felt particularly strongly by businesses in countries like Greece, Italy, Slovakia, and Spain. SMEs are the backbone of the Euro-area economy, representing about 99 per cent of all businesses in the EU, and currently contributing more than half of total value added to the economy (56 per cent in 2017). Recall that growth prospects were already bad before the pandemic; the list of woes includes over-regulation, rigid labour markets, tax avoidance, and political disarray. Moreover, European countries are heavily reliant on trade for even basic essentials and, with supply chains partially disrupted by COVID-19, the constraints on the economic environment may exacerbate things further. Overall, there is a risk of a further downgrade revision in growth forecast as a result of various dynamics: most countries are facing considerable contractions, Brexit negotiations, the spill-over of US-China trade tensions, and unified approval for the giant EU recovery fund.


At any point in time, the health of financial markets is a product of many factors, such as GDP growth, earnings, policy initiatives by lawmakers, liquidity, investor expectations, and other economic fundamentals. The power and impact of these different factors vary depending on time and context. Currently, the massive liquidity and growth (GDP and earnings) rebounds that are expected beyond 2021 seem to be the dominant factors driving bullish financial markets. Liquidity is a ‘fact’, one that alone is not enough, while ‘expectations’ is a hope that can either be met or disappointed.

The bull run in financial markets may continue to charge on the strength of liquidity steroids, but there is clearly a disconnect with the real (gloomy) economic picture painted above. The market is contemplating the various types of recovery (V-shape, L-shape, U-shape, and W-shape) but may need to review the assumption that recovery is a foregone conclusion. As Keynes remarked, “markets can remain irrational longer than you remain solvent” which, in our view, justifies a cautious stance.