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Organisational overview
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download this sectionRSA performance
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download this sectionSouth Africa
The South African economy contracted by 7% in 2020, which was one of the larger economic contractions globally. This outcome was, however, better than consensus expectations, aided by a faster-than-expected recovery in the second half of 2020. Despite the fact that the peak of the second wave of Covid-19 infections occurred in January 2021, South Africa’s real GDP then expanded by 4.6% quarter-on-quarter in 1Q21 – although it remained below the 4Q19 pre-pandemic base – implying that recovery was still far from complete. The pace of recovery thus far has also been very uneven, highlighting the pandemic’s unequal impact on activity in different economic sectors.
Household consumption has been surprisingly strong in FY21, increasing by 7.5% in 4Q20 and 4.6% quarter-on-quarter in 1Q21, to just 1.3% below its 4Q19 pre-pandemic base. We attribute the resilience to policy support measures, increased savings by individuals and the fact that job losses induced by Covid-19 were concentrated in lower-skilled occupations as opposed to occupations where income levels are higher.
That said, consumers appear to be pessimistic about current conditions, with the Consumer Confidence Index (CCI) compiled by the Bureau for Economic Research (BER) deteriorating to -13 index points in 2Q21 from -9 in 1Q21. By contrast, the RMB/BER Business Confidence Index (BCI), increased by 15 points to 50 in 2Q21. This was the BCI’s first reading in “positive” territory since 4Q14 and implies a significant improvement in sentiment, although gross fixed capital formation in 2Q21 was 17.8% lower than in 4Q19.
Consumer and business sentiment levels are likely to be adversely affected by the negative economic effects of the restrictive measures once again enforced during the Covid-19 third wave, as well as the recent incidents of unrest. The third wave accelerated sharply from early June, exceeding the severity of the first and second waves, with new daily infections peaking at 26 485 on 3 July 2021. To counter this, the government progressively tightened lockdown restrictions, from Level 1 on 31 May to Level 4 on 28 June and although it strived to keep much of the economy open, the adverse effects of the restrictive measures on growth are likely unavoidable.
Meanwhile, the violent protests and looting that took place in July 2021, after year end, were a further serious setback, given the business interruptions, damage to economic infrastructure and disruptions to supply chains they caused. The spending directed towards cleaning up and supporting affected businesses (to combat the increased risk of insolvencies), and the potential need to recapitalise the state-owned South African Special Risks Insurance Association (SASRIA) will add to the government’s fiscal burden. SASRIA has said that it will be able to settle claims of up to R10bn from its own balance sheet, But the South African Property Owners Association (SAPOA) has estimated that the unrest will cost the economy at least R50bn.
As in other countries, the combination of supply-side price shocks, improving economic activity and fears of contagion from a global bond market shock has raised concerns in South Africa about the future path of inflation. While there are several cost-push factors (including fuel and food prices and shortages of raw and intermediate inputs) exerting upside pressure, our economists are of the view that the ongoing weakness in the labour market (unemployment rate of 32.6%), evident in both subdued wage inflation and the slow recovery in employment levels, will keep demand-pull pressure inflation muted, and that any near-term shocks will be transitory. They believe that headline CPI inflation in the current cycle has peaked and is set to remain broadly anchored close to the mid-point of the South African Reserve Bank’s 3% to 6% target range.
As economic activity gradually improves, the market will increasingly focus on understanding when the SARB will start to withdraw the exceptional economic support measures introduced in response to Covid-19 – and how fast and how far it will go in doing so. These measures include the reduction of the repo rate to a record low of 3.5% in May last year, but Absa economists expect the SARB Monetary Policy Committee to keep this rate on hold for the remainder of 2021, before increasing it by a cumulative 75 basis points during 2022 and a further 50 basis points in 2023.
South Africa’s external balances are currently strong, with record trade and current account surpluses reflecting the surge in export commodity prices and to some extent these surpluses mitigate the risk of a global inflation surge and a bond market dislocation spreading into the economy via the capital account. Meanwhile Absa economists forecast a national budget deficit of 7.9% of GDP in the current fiscal year and 6.6% in FY22/23, and a rising debt ratio over the next few years that will peak in FY25/26 at 84.5%.
Although there has been some structural reform progress, the to-do list remains long. The most notable reforms to date are the increase in the licensing threshold for embedded electricity generation projects from 1MW to 100MW, and the decision to corporatise and unbundle Transnet’s port operations. The sale of 51% of the perennially loss-making SAA is symbolically important, but due diligence is pending, among other suspensive conditions. The implementation of further necessary reforms could also take time, due to the weak implementation capacity of the state as well as ideological contestation within the governing alliance. Without a much more aggressive structural reform programme, Absa economists are of the view that further credit rating downgrades are more likely than not.
Absa economists forecast GDP growth of 4% for 2021, following a stronger-than-expected 1Q21 outcome. In 2022, widespread vaccination should deliver a further boost in confidence and will likely lead to a stronger improvement in tourismrelated activity. However, beyond this, real GDP growth is forecast to settle at just below 2% per annum, reflecting the ongoing difficulty of undertaking reforms, some lasting damage from the pandemic and the recent political unrest, which may well dampen investor sentiment.
The outlook for the property sector, much like that for the economy as a whole, is clouded by uncertainty as South Africa – and the rest of the world – navigate the Covid-19 pandemic. As is evident in other countries, the path to normalisation is dependent on the pace of vaccine roll-out. With only 7% of the South African population vaccinated as of 13 August 2021, the risk of recurring waves of infection remains a reality, and a likely headwind to economic recovery. Given the slow pace of the vaccine rollout, combined with an absence of catalysts for meaningful economic growth, property fundamentals are likely to remain under pressure.
Sources: Absa Research, IMF, Bloomberg
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Australia
So far, Australia seems to have weathered the pandemic better than many other countries. It has been able to avoid wide-spread infection of its population through a combination of health management initiatives and the implementation of stringent travel restrictions. Australia effectively closed its borders to non-residents from mid-March 2020 and these restrictions remain in place to date. Swift, localised lockdowns in cities where infections threaten to spread have aided in the containment of community spread. Nevertheless, the effects of Covid-19 meant that Australia was unable to avoid its first recession in 30 years and ended 2020 with GDP growth down by 2.4%. This was primarily due to changes in consumer spending patterns that were driven by the limited access to certain goods and services as well as personal financial uncertainties.
Australia’s economy rebounded rapidly in 1Q21 as Covid-19 cases declined and restrictions were eased. GDP growth was 1.8% quarter-on-quarter and surpassed its pre-pandemic level in nominal terms. This swift recovery was driven by rising consumer spending that was due to pent up demand, increasing business investment and the higher prices of commodity exports. The recovery was also fuelled by strong fiscal and monetary policy responses implemented by the government. The JobKeeper wage subsidy programme has kept the unemployment rate low, with unemployment falling to 5.2% in June 2021 from 6.5% in December 2020.
The Reserve Bank of Australia (RBA) Cash Rate, the country’s benchmark interest rate, was cut to 0.1% in November 2020 and has remained at this level since. Headline inflation rose to 3.8% y-o-y in 2Q21, which is above the RBA’s medium-term target range of 2% to 3% thanks to base effects that are considered transitory in nature. Market expectations are for the monetary policy to remain accommodative.
Bloomberg consensus forecasts expect the Australian economy to grow by 4.8% in 2021 on the back of the strong recovery seen in the first half of the year. However, a slower than anticipated vaccine roll-out, combined with a surge in Covid-19 cases driven by the Delta variant, presents downside risks to this forecast. Australia’s two most populous cities, Sydney and Melbourne, have been under lockdown since June 2021 in response to a rise in infections, and early macro-economic indications are that this will dampen economic recovery in the third quarter. Australia is lagging developed market peers, with only 19% of the population fully vaccinated due to a delayed start to the programme plus some population complacency. The government is aiming to have 80% of the adult population vaccinated by year end and claims to have secured sufficient vaccine supply to achieve this.
Transaction volumes in the office sector were negatively impacted by the pandemic in 2020 as investors adopted a cautious approach on reduced demand for office space, highlighting the structural demand uncertainties associated with potentially broader adoption of work from home. By contrast, the industrial and logistics sector showed sturdy resilience due to high quality covenants and confidence in the ability to collect income. This trend continued through the first half of 2021 as the industrial and logistics sector experienced a period of sustained elevated activity among both the occupiers and investors.
Sources: Absa Research, Bloomberg, KPMG Australia, Reuters, JLL
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Central and Eastern Europe: Poland and Romania
Poland real GDP (%) |
Sources: Absa Research, Bloomberg |
The CEE-6 region, consisting of Poland, Romania, Hungary, Czech Republic, Bulgaria and Slovakia, outperformed the EU in 2020 despite the impact of Covid-19. The region averaged a 4.3% GDP contraction for the year, compared to the EU average of -5.9%.
The Polish economy has managed to navigate the pandemic relatively well to date. Poland’s GDP contraction of 2.7% in 2020 was significantly better than the 4.6% average contraction of its CEE peers. GDP growth rebounded to 1.1% quarter-on-quarter in 1Q21, and the unemployment rate of 5.9% in 2Q21 was only marginally weaker than the pre-pandemic rate of 5.2% in December 2019.
This relative economic outperformance can largely be attributed to two key factors, the first being Poland’s geographic location, which meant that it was affected by the coronavirus relatively late, allowing the Polish government adequate time to prepare and implement a lockdown strategy that limited the impact of the first wave of infections, and allowed restrictions to be relaxed over the summer period. Secondly, the composition of the Polish economy, which is less service-based and more manufacturing focused, made it more resilient to lockdown measures.
The relaxation of lockdown restrictions combined with a successful vaccination campaign (47% of the population fully vaccinated) is expected to positively contribute to a sustained recovery for the remainder of 2021. Bloomberg consensus forecasts expect GDP to grow by 4.8% in 2021, primarily driven by pent-up demand.
Polish real estate investment volumes declined by 30% in 2020, but still achieved the third best result on record. Investor focus shifted significantly towards industrial and office assets, which made up 48% and 35%, respectively, of total investment volumes in 2020. This sectoral shift in focus continued through to 2021, and growing confidence combined with pent up demand boosted investment activity during the first half of the year. Leasing activity in the office sector also accelerated in 2Q21 as restrictions eased, but tenants are increasingly looking for shorter-term leases and flexibility as they assess their changing working model and space requirements.
Sources: Absa Research, Bloomberg, Polish National Statistics Office, LSE, JLL
Poland and Romania unemployment (%) |
Source: Absa Research |
Romania managed to avoid a technical recession in 2020 as it recorded only one period of negative growth in 2Q20 (-12.8% quarter-on-quarter). The Romanian economy contracted by 3.7% in 2020 as strict lockdown measures in the first half of the year dampened consumer spending, the main driver of economic growth in recent years. In contrast, strong construction activity and a boost in public investment to the highest level in a decade limited the economic fallout induced by Covid-19. Output rebounded sharply with quarter-on-quarter growth of 4.8% recorded in 4Q20 as restrictions were eased and economic activity resumed. This strong performance is expected to continue through 2021, with quarter-on-quarter GDP growth of 2.8% recorded in 1Q21 and Bloomberg consensus forecasts estimating 6% growth for 2021 and a return to pre-pandemic levels. Unemployment is expected to settle at 6% by the end of 2021, compared to 3.9% in December 2019.
However, a slow vaccination campaign threatens to dampen the positive growth outlook with only 25% of the Romanian population fully vaccinated, well below the EU average of 54%, leaving the country vulnerable to further waves of infection and accompanying lockdowns. The pace of the vaccination rollout has been negatively affected by population hesitancy and infrastructure difficulties, given the country’s large rural component.
Romanian property investment volumes rose by almost 30% in 2020, driven primarily by transactions initiated before the onset of the pandemic. Offices were the most liquid asset class and accounted for 85% of total market volume. The impact of the pandemic on the real estate market has been lower than expected, with investors being encouraged by the swift macro-economic recovery, so transaction volumes remained robust through the first half of 2021.
Sources: Absa Research, Romania National Institute of Statistics, European Commission, JLL
United Kingdom
The UK economy contracted by 10% in 2020 as Covid-19 severely impacted economic activity and brought the country to a near standstill. The UK was relatively badly affected when compared to its developed country peers; the US and EU, for example, recorded GDP contractions of 3.4% and 5.9%, respectively in 2020. This relative underperformance can partially be attributed to the largely service-driven nature of the UK economy, as well as the severity of the lockdown restrictions imposed throughout much of the year. Following an easing of restrictions in 3Q20, which saw quarter-on-quarter GDP growth of 16.9%, the UK entered into a second hard lockdown in November 2020 in response to a rapid rise in infections and some level of restrictions remained in place throughout much of the first half of 2021.
Initial fears about a sharp rise in unemployment were proved unfounded as the government furlough scheme successfully supported the labour market and kept unemployment relatively low at just 4.4% in December, compared to 3.8% a year earlier. At its peak, the Coronavirus Job Retention Scheme supported around a third of private sector employees.
A successful vaccination campaign has seen 71% of the population receiving at least one dose of a Covid-19 vaccine and 60% being fully vaccinated. This has enabled a phased reopening of the economy, with the majority of domestic Covid-19 restrictions having been removed by mid-July. Bloomberg consensus forecasts expect GDP to grow by 6.8% in 2021, driven by a combination of pent-up demand, excess household savings and an increase in business investment. A return to pre-pandemic growth levels is expected by 2022, with consensus forecast growth of 5.5% for 2022.
UK inflation rose to 2.5% year-on-year in June 2021, which is above the Bank of England’s 2% target level and mostly due to a sharp rise in demand combined with rising cost pressures and increased import costs from the EU. These factors are, however, expected to be transitory and expectations are for monetary policy measures to remain accommodative to limit the impact of potential downside risks.
These risks include a rise in business insolvencies and unemployment as government support schemes are tapered off. The unemployment rate is forecast to settle at 5.1% at the end of 2021, according to Bloomberg consensus. Further headwinds could arise as the impact of Brexit on EU trade becomes apparent. Initial data indicates that UK trade with EU countries was 27% lower in the first four months of 2021 than in the same period in 2019, while trade with non-EU countries only showed a 13% decline. However, it is still too soon to draw conclusions on the long-term impact of Brexit as key negotiations remain ongoing. Another downside risk is that there will be a rapid rise in Covid-19 cases again as restrictions are lifted and possible new variants emerge, and a return to stricter lockdown measures in response.
Recovery is expected to differ across sectors following the reopening of the economy as certain trends take longer to reverse and others potentially do not ever revert to prepandemic norms. Food and drink activities, hotels and air travel, which were the most severely impacted sectors in 2020 and much of the second lockdown, are likely to rebound sharply following the relaxation of a majority of domestic Covid-19 restrictions. In the retail sector, the permanency of the accelerated adoption of online retail remains to be seen. Online sales as a proportion of total sales peaked at 36% during the pandemic, but declined as restrictions were eased, which indicates a significant return to bricks and mortar trade.
Sources: Absa Research, Bloomberg, KPMG UK, PwC UK
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Mahir Hamdulay
Equity Analyst
Absa Capital