The world is recovering from the pandemic and 2021 should see strong global economic growth. The epicentre of the recovery is now the United States, where the new Democratic administration has pushed through Congress a further US$1.9tn spending package, additional to the US$0.9tn approved in December. The combination of massive fiscal spending and an economy already recovering from last year’s severe contraction, is a formula for explosive growth during 2021.
By way of contrast, China has already largely returned to normal, and its authorities are taking steps to reduce economic growth to a more sustainable pace. Supply chains are being disrupted by shortages of critical components and the upturn in business activity is likely to be accompanied by rising prices. Central banks are not concerned about a possible uptick in inflation because they expect this will be transitory. However, markets reflect greater concern about these risks, and US long-term bond yields have been inexorably moving higher.
The pace of the roll-out of vaccination programmes has become a focus of concern both politically and economically. By the end of the Northern summer, most developed countries should have largely completed the vaccination of their populations and manufacturing capacity will become available to supply vaccines to poorer countries. As South Africa can afford to pay for vaccines, it should be able to procure what it requires.
South Africa remains a story of contrasting fortunes. The primary sectors, mining and agriculture, are booming due to record demand and prices. Other sectors, such as hospitality, remain trapped by the disastrous consequences of the pandemic. However, the multiplier effect of increased spending by the mines and farmers should have a positive impact on the economy as a whole. Buoyant export revenues have also stabilised the rand exchange rate. Windfall tax receipts in excess of R100bn have ameliorated the dire fiscal situation but the deficit remains unsustainably large.
As a consequence, the yield curve is extremely steep because government spending is consuming the majority of national savings. Inflationary pressures remain benign and at its meeting on 25 March, the Monetary Policy Committee of the SA Reserve Bank left short-term interest rates unchanged.