Does herd immunity mean economic recovery?

09 June 2021 Myra Knoesen

Alexander Forbes Investments hosted a discussion on the developing themes that will impact both South African and global investors in 2021 and beyond.

Isaah Mhlanga, Group Chief Economist at Alexander Forbes said that the pandemic has had a negative effect on economies, and the global recovery rate will affect South Africa’s recovery. “Global trade volumes show signs of a recovery, but the recent resurgence in Covid-19 infections and lockdowns poses a risk,” said Mhlanga.

“Global growth is expected to rebound by 5.5% in 2021, from a revised projected contraction of 3.4% in 2020. Global activity will remain well below pre-Covid, January 2020, levels. Even with anticipated recovery in 2021 and 2022, output gaps are not expected to close until after 2022, added Mhlanga.

Fiscal stimulus in economies

Global central banks, according to Mhlanga, reacted swiftly and forcefully to the Covid-19 pandemic, deploying the full range of monetary policies.

“Major economies have pledged to increase fiscal stimulus in 2021. The US President elect Joe Biden announced a $1.9 trillion stimulus plan to support the US economy through the pandemic. The stimulus package includes $1 400 cheques for most Americans, a temporary boost in unemployment benefits, and a rise in the federal minimum wage to $15 per hour. Also, $400 billion of new spending to tackle the Coronavirus pandemic, with $20 billion planned towards a national vaccine program and $50 billion for increased Covid-19 testing,” said Mhlanga.

“In the EU, the adopted long-term budget indicated a total of €1.8 trillion earmarked to rebuild a post-Covid-19 Europe. This includes a €750 billion NextGenerationEU, a temporary recovery instrument for a greener, more digital and more resilient Europe,” added Mhlanga.

“In the UK, an additional GBP 4.6 billion ($6.2 billion) support package was extended to firms to soften an expected recession caused by a surge in Covid-19 cases that has prompted a third national lockdown. It will take at least 18 months for the UK economy to return to its pre pandemic growth level and its recovery will lag behind that of its peers. Consensus projects that UK GDP would not regain its previous level until the second half of 2022, or later as political mismanagement of both the pandemic crisis and of Brexit has ensured that the UK would underperform other richer countries. The biggest risk to the economic recovery in 2021 would be early fiscal policy tightening, fiscal stimulus will remain essential in 2021 to underpin the recovery in overall GDP and to address the inequalities the pandemic has created or exacerbated,” continued Mhlanga.

The South African economy

“South Africa is currently in the second wave of Covid-19. With the relaxation from level three, the risk of a third wave of Covid-19 infections in winter will be a drag on growth. Lockdown restrictions are necessary to reduce the transmission of the Covid-19 virus. However, lockdown restrictions have economic costs (businesses go bankrupt, job losses and income losses), which we expect to continue this year. It is government’s responsibility to cushion the economy. Pressure for government to extend the temporary employer/employee relief scheme and establish a basic income grant will increase fiscal risk, though necessary. Fiscal risk remains very high, especially beyond 2022. Cushioning the economy has unavoidable fiscal costs which will need to be paid for in future (expenditure cuts, tax hikes and faster growth),” said Mhlanga.

“South Africa’s race to herd immunity and economic recovery rests on several logistics of vaccinations. The basic assumption we make is that vaccinations will only be meaningful from the second half of 2021 and herd immunity reached sometime in 2023. The economy will not return to full capacity until herd immunity is achieved, meaning growth will be constrained via cautious consumption, fiscal consolidation, and business disruptions. The other issues revolve around who to vaccinate first, effective distribution, and wide acceptance and take-up of the vaccine, etc., which we expect to see in the second half of 2022,” added Mhlanga.

“We expect growth to improve in 2021, before moderating in 2022; our expectations are slightly lower than consensus in both years (inflation forecast in line with consensus). We expect the unemployment rate to be higher than consensus, based on lower growth than consensus. Fiscal consolidation will begin this year and will remain necessary for much of this decade. Monetary policy normalisation will likely begin in the second half of 2022, given low inflation and accommodative global financial conditions and we expect Rand weakness over the medium-term as fiscal risks increases, but there is a risk of short-term strength driven by global risk appetite,” he added.

Key themes in 2021

Lebo Thubisi, Head of Manager Research at Alexander Forbes Investments, detailed key themes that he believes are most likely to play out in 2021 and beyond:

  1. Entrenching sustainability and environmental, social and corporate governance (ESG) factors - 2021 will certainly be a key year for tackling climate change. We are also seeing a regulatory onslaught of global green finance taxonomies at the same time as National Treasury is working to develop a first national green finance taxonomy for South Africa. Covid-19 has also led to a rethink of diversity and inclusion practices around inequity, gender pay disparity and parental responsibilities.
  2. The rise in consolidation of the asset management industry - The market environment has meant that there has been a quickening of the pace of consolidation in 2020, which is expected to continue in 2021. This has come as some larger investment managers have used their scale to expand profit margins, while offering products at lower costs. Many of these firms have done so by investing in new technology to improve performance and efficiency, while freeing resources for more profitable activities.
  3. Monetisation of data analytics - Artificial intelligence can dig deeper and find the ‘invisible relationships’ that exist between data sets. Its task is to suggest the better option with an unbiased view given the stipulated parameters and make accurate predictions. It may also be powered by a predictor which will allow you to get as accurate predictions as possible, considering real-time and historical data. The cloud also brings in on-demand storage and processing capabilities, resulting in new developments such as advanced analytics to process virtually all kinds of structured and unstructured data to improve decision making.
  4. Alternatives revolution – era of diversification - Thubisi agreed with Boston Consulting Group that “the alternative fund industry is going to grow significantly over the next five years. People are going to move away from equities, and investors are going to expand their longevity outlook and invest with a longer time horizon in mind.”

“Global growth will improve but will remain constrained until herd immunity is achieved. South Africa’s growth will rebound from low base but normalise around 2%... there is value in South African asset classes driven by a weakening US dollar cycle that favours emerging markets,” concludes Mhlanga.

Writer’s thoughts:
The road to recovery is long… but there is light at the end of the tunnel with global growth expected to rebound by 5.5% in 2021. Do you believe the economy will only return to full capacity when herd immunity is achieved? If you have any questions please comment below, interact with us on Twitter at @fanews_online or email me - [email protected].

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