Macro Economic Commentary – September 2020

Author: Ntsekhe Moiloa

South Africa moved into level one lockdown during the final third of September. There has been an obvious sigh of relief, especially in provinces such as the Western Cape where models were predicting that differentiated lockdown could see the Western Cape at level four as late as October before improving to level two at year-end. Level one in Gauteng was expected only in December, with level three predicted for October. The Eastern Cape and KwaZulu-Natal looked similar to Gauteng on the differentiated models.

Both the earlier movement to level one and the realisation that we would not be dressed in Hazmat suits for the rest of the year have unsurprisingly contributed to a resurgent retailer confidence reading in the Bureau of Economic Research’s Q3 survey. July production readings for both mining and manufacturing released in September showed a continued recovery from the first quarter lows, while bank transactions confirmed a rebound in underlying activity.

As if to underline the exit from emergency conditions, the SARB’s Monetary Policy Committee narrowly chose to hold the policy rate steady. In remarks one of the members mentioned that balance has generally returned to the money market in the sense that rather than contributing liquidity, the central bank is back to mopping up excess liquidity more often than not. In that sense, the policy tools needed by the economy lie more on the side of the fiscus than of the central bank. SARB interest rate policy, for example, is unlikely to inspire the many who have given up looking for jobs resulting in an anomalous drop in the unemployment rate to about 23 percent.

Yet the return to a more normal situation raises other questions; can we truly return to business as usual when the country was desperate for structural reform before the various stages of lockdown began? The SARB lowered its near-term expectations for both inflation and potential growth, highlighting something that has often been said, which is that South Africa has a growth problem. Monetary policy tools such as lower interest rates are too blunt and ultimately insufficient in the battle to raise the economy’s growth potential. Structural reforms such as a cheaper and more efficient public sector, a more responsive labour market, better law enforcement and better public infrastructure, are necessary. These are needed to complement the solid financial sector, solid judicial sector and press freedom that are already in place. They are also needed to support the achievement of better health outcomes and an education sector that is not only better but also more relevant to the current age.

As we come out of university we are at an age where the value of time begins to palpably rise at an exponential rate. It is not just time value of money (or wasted money) compounding, but for those who still have their parents at that time it is the “extra time” value of that wisdom that guided us to our degrees. To our first interviews. Through our first jobs. Our first investments, retirement plans and insurance policies. Relationships. Highs and lows. We are poorer without that wisdom.

As we have looked after your families, we have sometimes had to say goodbye within ours. Nothing is for nothing. There is no free lunch even in the difficult times; we are always learning something or being reminded of the value of compounding of wisdom as we battle on.

The family of American liberalism lost a guiding light this September, barely a month and a half before the national election. Justice Ruth Bader Ginsburg had battled ill-health for years but was determined to remain seated on the Supreme Court at least into 2021. Life sometimes comes to different arrangements. Her passing has sparked a debate about the propriety of filling a vacancy in the year of a presidential election, much less within weeks of one. It is an interesting calculus because Republicans had previously argued that vacancies in an election year should remain unfilled but now wish to rush a nomination and seating while they hold the presidency and the Senate majority. Though there is a possible short term gain to that strategy, it risks being short-lived, and upending the calculations of some investors who still believe that there is a path for President Donald Trump and his economic approach to return to the White House for a second term.

And Mr Trump does have a path back to the White House, despite the multitudes who would rather see the last of him. The first debate at the end of the month was simply shambolic. Mr Trump approached it like a boxing match, jabbing in so many interruptions that the moderator had to interject so frequently that it appeared that the moderator was the opposing candidate. We learned nothing new from either Mr Trump or Mr Biden, but what was striking was how halting Mr Biden was. For American voters who care about deregulation, about judicial conservatism, about lower taxes and about stock market strength, there was nothing in Mr Biden’s delivery that gave them cause to move him to the front of their choices. Mr Trump came across as bullying and dominating, a characteristic that might give a sense of comfort to independents looking for negotiating strength. Mr Trump needs to consolidate to avoid scoring own goals.

The fight for Justice Ginsburg’s seat seems like an arbitrary place to launch a discussion about the outlook for investment markets, but there is a connection. Dominating the federal bench and the Supreme Court have been long-standing goals of the Conservative movement in the United States. Installing staunch textualists is seen as a necessary bulwark against contextual interpretation of law favoured by liberal, social justice activists. Indeed, in her own nomination acceptance remarks, Judge Amy Coney Barrett said that “judges must apply the law as written. Judges are not policy makers and they must be resolute in setting aside any policy views they might hold.” Conservatives consider interpretative jurisprudence as being interested in curtailing certainty and freedoms that businesses have in which to operate, freedoms that individuals have to bear arms, legal shields for law enforcement officers, and questions about the right to life, amongst many hot button issues. The nine justices of the Supreme Court have been the last word on such matters for a century and a half. Yet the size of the Court is not constitutionally prescribed. It was last set at nine by statute in the Judiciary Act of 1869. If Senate Democrats are able to delay the Court vote until after the election, and liberals are spurred to their voting stations by the possibility of winning control of the Senate, a Republican-led seating of a replacement in the lame duck session may lead to a Democrat-led Congress and a Democratic president moving to change 28 USC 1 to expand the size of the Court, thereby diluting the Conservative influence. In response at least two Republican senators are drumming up support for legislation that would either forbid Court expansion or suspend it for ten years after a change in the law. Democratic representatives in the House are crafting term-limit legislation for future Supreme Court Justices. These punches and counterpunches all tug at the fraying strands of the bipartisanship that has supported stability and prosperity in the United States since the Second World War.

The genie is already out of the bottle in this judiciary fight. The president had the choice to delay the fight to give vulnerable Republican senators the chance to make a stronger case for returning to Washington to install a Republican-picked Justice. Instead Mr Trump moved ahead like someone fearing that Republican dominance of the Senate and the White House was drawing its last breath.

A move to seat a conservative Justice before the next Congress could also affect how Mr Trump’s record is assessed in the lead-up to the election. Despite the president’s questionable responses to many social and political challenges, there is broad agreement that economic performance is as important to voters in this cycle as it has been in past election cycles. The propensity of American voters is to engage in retrospective framing, asking themselves whether performance in the past merits a further bite at the cherry of power. Assuming the debate remains on that ground, the performance of the US economy during Mr Trump’s first term gives him a viable talking point, especially with independents. Arguing about the Supreme Court distracts from that talking point and whistles largely to his base, whose fervour has not been enough to push him into the lead in polls. Interestingly, the Supreme Court issue also gives Democrats an opening to revive the 2018 midterm election strategy of talking about healthcare and only healthcare, because they estimate that voters will be sufficiently worried that a Conservative-leaning Supreme Court could finally dismantle the Affordable Care Act popularly known as Obamacare. A hearing on Obamacare is set to be held at the Supreme Court a week after election night, making the composition of the Court a high interest topic. Voters may not like the cost of their healthcare but they like that they are covered. Arguably, the retracement in US equity markets in September while companies are reporting rising earnings suggests that markets are hesitant about the operating backdrop that includes the heated political arguments. It hardly matters that 13 past winners of the economics ‘Nobel’ prize have issued a joint letter of support for candidate Joe Biden’s economic ideas.

Although the recent economic energy of the US clearly began under President Obama — and then Vice President Joe Biden — and eventually deflated on the current president’s watch, Mr Trump has quickly learned that history is written by the victors. Like Mr Obama, his policies have been a boon for the wealthy, but he gets to cast himself as benefitting the man in the street. Although government data as well as a new Pew Research Center survey suggest that about half of the people who lost their jobs due to the COVID-19 pandemic are still without jobs, the Trump campaign should arguably be laser-focused on keeping the conversation on claiming that he was a good steward of the economy before ‘China upset the apple cart’ with COVID-19. The only certainty with Mr Trump is that he has hitched his wagon to the stock market. And connected to that is that investors really do not know much about Mr Biden’s preferences.

As a postscript, before US stock markets opened on the second day of October, we learned that Mr Trump had contracted COVID-19 along with his wife. Stock markets around the world swooned. We learned that a number of close aides and close allies had also contracted the coronavirus in later news releases. There is suspicion that the nomination ceremony at the White House where Mr Trump introduced Judge Amy Coney Barrett as his nominee, may have been the occasion when COVID-19 finally settled in among the denizens of the West Wing. Despite messages from the White House that Mr Trump would continue to work from there while isolated, he was seen later that Friday boarding a helicopter headed to Walter Reed National Military Medical Center for what was likely to be a multi-day stay. That too changes the calculus of the election as his convalescence will remove Mr Trump from the high-energy rallies that he prefers to demonstrate his vitality, and will simultaneously return the focus of public discussion to his management of the pandemic. That is something senior Republicans have said they would like to avoid at all costs.