Keep an eye on these indicators during COVID-19

October 2020

Ikageng Maluleke, Agricultural  Economist, Grain SA. Send an  email to Ikageng@grainsa.co.za

With the Covid-19 pandemic upon us, the world is facing a global health crisis, part of the implications are deep economic, and social impacts felt across the world. South Africa together with other countries across the globe decided to lockdown the country to contain the spread of the virus.

For agriculture, which is considered an essential service, the better part of the operations kept going, although there were a few bottlenecks. The lockdown measures that were taken severely affected an already-weak economy. With the challenges facing the economy, farmers need to understand how the overall state of the economy affects their businesses, either directly or indirectly.

RAND/DOLLAR EXCHANGE
An exchange rate is a rate at which the currency of one country is exchanged for the currency of another country. South Africa operates within a flexible exchange rate regime and this means that market forces of demand and supply determine the value in relation to other currencies. A currency’s value is mainly determined by demand for goods and services of a country. Since lockdown began, the rand weakened by 22,9%. A weaker rand is supportive towards exports of maize, but the opposite applies to imported inputs like crude oil. 

CONSUMER PRICE INDEX (CPI)
Measures the changes in prices for household goods and services monthly. Changes in the CPI record the rate of inflation or rising prices and deflation or falling prices. The annual inflation rate in South Africa fell to 3% in April 2020 from 4,1% in March but remained within the Reserve Bank's target of 3% to 6%. Food price inflation, which is a component of CPI, represents the movement in food, indicating an increase in the wholesale price index of essential food items relative to CPI. Food price inflation has increased to 4,6% in April compared to 2,9% the same month last year. 

REPO RATE
Is the rate at which the Reserve bank of South Africa lends money to commercial banks in the event of any shortfall of funds. The monetary committee uses the repo rate to control inflation. The South African Reserve Bank has reduced the repo rate by 250 basis points this year, bringing it to a 50-year low at 3,75%. This move is supposed to ease financial conditions and improve the resilience of households and firms to the economic implications of the COVID-19 outbreak. 

BUSINESS CONFIDENCE
Measures the degree of optimism that describes the forward-looking expectations of businesses. It is the willingness of investors to engage in investment opportunities based on their perception of risk and return in the economic environment. Businesses give their expectations of the next 6 to 12 months. According to SACCI, business confidence index sank to 77,8 in April 2020 from 89,9 in March. 

CONSUMER CONFIDENCE
Measures how consumers feel about the overall state of the economy and their financial situation. When consumer confidence is high, consumers make more purchases. When confidence is low, consumers tend to save more and spend less.

GROSS DOMESTIC PRODUCT (GDP)
Is the total value (monetary or market value) of all finished goods and services produced in a country in a specific period. Since GDP measures domestic production, it functions as an indicator of a country’s economic health; it is used to estimate the size of an economy and growth rate. It has been forecasted that the economy could contract by 7% in 2020, revised from the 6,1% decline initially expected in April. Even if lockdown conditions are eased and economic activities recommence, GDP is not expected to grow by more than 4% in the next two years. 

UNEMPLOYMENT RATE
Refers to the percentage of the workforce that is unemployed but is willing and able to work and actively looking for work. The unemployment rate is a useful measure of the underutilisation of the labour supply. Reflecting the inability of an economy to generate employment for those people who want to work. South Africa's unemployment rate rose to 30,1% in the first quarter of 2020 from 29,1% in the previous period. It is the highest recorded amount since 2008. The reported amount was before lockdown regulations were instituted. Taking the lockdown situation into consideration treasury estimates that the unemployment rate will surpass 50%. 

CONCLUSION 
There is a lot of uncertainty in the economy caused by the COVID-19 pandemic. With lockdown expected to ease in the coming months, for the rest of the year and even the first half of next year, investments, imports and exports are expected to decline sharply, with job losses expected to be widespread. Although monetary policy has been used to try to cushion the economy, on its own it cannot improve growth rate or reduce financial risk in the economy. South Africa requires bold policies that will lower costs generally and increase investment opportunities, growth potential and job creation. 

Publication: October 2020

Section: Pula/Imvula