SA economy shows green shoots of recovery as lock-downs ease

The South African economy is showing signs of a potential recovery as lockdown restrictions begin to ease. The latest BankservAfrica Economic Transaction Index for June 2020 has reported a slight uptick in economic activity, with transactions increasing to 101.7 points compared to the weakest point of 98.1 in May. Mike Schüssler, Chief Economist at Economists.co.za, provided insights on the current economic landscape in a recent interview with CNBC Africa. Schüssler pointed out that the recent inflation numbers came in lower than expected, which has positive implications for the economy. The lower inflation rate indicates that interest rates can remain low for an extended period, providing a much-needed window for economic recovery post-lockdown. He predicts a potential downward adjustment of interest rates by another 25 basis points in the near future, with the possibility of a rate hike only expected around April or May next year. One of the significant contributors to the lower inflation rate has been the substantial drop in fuel prices, attributed to reduced demand for gasoline due to travel restrictions during the pandemic. However, the impact of lower fuel prices has been offset by price increases in food and beverages, with some categories experiencing up to a 5% rise in prices. Schüssler emphasized that while the current inflation rate seems to have hit bottom, it may gradually rise back to around 3% in the coming months. The economist also discussed the concept of 'lower for longer,' referring to an extended period of low-interest rates to support economic recovery. Schüssler believes that maintaining low-interest rates for the next 11 to 12 months could pave the way for a return to more normalized economic conditions, albeit with some sectors facing longer recovery timelines due to persistent consumer apprehensions related to the pandemic. Looking ahead, Schüssler expressed cautious optimism about the economic recovery, noting that certain sectors such as hospitality are still facing challenges. Despite this, he expects a gradual improvement in economic growth in the third quarter of the year, following a significant contraction in the second quarter. He anticipates a double-digit decline in GDP for the second quarter, followed by a 10 to 15% rebound in the third quarter. When discussing the future trajectory of interest rates, Schüssler acknowledged the possibility of some reluctance from policymakers to raise rates once the economy stabilizes. He emphasized the importance of maintaining a balance in monetary policy to support ongoing recovery efforts and consumer confidence. As South Africa navigates through these challenging economic times, it remains crucial for policymakers to adopt a strategic approach that fosters sustainable growth and resilience in the post-pandemic era. In conclusion, while South Africa is still on the path to economic recovery, the gradual easing of lockdown measures and supportive monetary policies are expected to play a vital role in revitalizing the economy and restoring consumer confidence.