Covid-19 note

Friday 31 July 2020

21% of South Africans lost their income in June from the lagged effects of the extreme lockdown in April and May, showing the opening up of the economy in June (and only somewhat in May) had little mitigating effect

▪ The number of individuals losing their salaries over June fell by -20.7% y/y (according to the latest BankservAfrica data), while May saw a figure closer to -14% y/y and April around only -1.0% y/y, as the lagged effect of the very severe lockdown the South African economy has experienced this year has started to come through in the data.

▪ The BankservAfrica Take-home Index (BTPI) “records the majority of payments from large corporates and a fair number of medium-sized firms that are served by payroll service providers and firm-owned payroll administrators, the recent decrease may not reflect the full impact of salary declines on small firms.”

▪ Employment lags (is affected by earlier periods of) economic activity, and the state induced collapse in the economy in April on the severe lockdown, along with a collapse in the global economy in the same period as governments around the world also shut down large parts of their economies’ activities, has had a dire impact on household incomes in general.

▪ In South Africa, state subsidies to low income earners have assisted households, and many high income earners and savers have managed to subsist on savings, but the middle income band has been severely affected, with many sliding into poverty, in turn contributing to further severe weakening in economic activity as demand has reduced.

▪ The private sector is seeing markedly lower levels of renumeration overall this year compared to last year, while civil servants do not see this collapse, managing to avoid their salaries being reduced by and large, and instead even having agitated via unions for higher levels of renumeration despite the collapse in government’s tax revenues this year.

▪ BankservAfrica says that with its Take-home Index (or BTPI) “representing the majority of payments from civil servant and state-owned entity payrolls, it becomes evident that the reduced salary numbers are most likely to be in the private sector.” The President has urged high paid civil servants to take pay cuts, and salary freezes more broadly.

▪ BankservAfrica adds, “an estimated 30% of the BTPI monthly equivalent payments are paid by the broader government sector compared to 21% shown in Stats SA’s Quarterly Employment Survey.” The civil service has swollen over the past decade, while their wages have tended to increase at a faster pace than those in the private sector.

▪ As the largest automated payments clearing house in Africa, BankservAfrica says the drop in take-home payments in June 2020 (-20.7% y/y) “are concerning and will have a profound impact on the South African economy. The knock-on impact is also likely to be larger than many have estimated and will have a severe impact on retail sales and consumer spending."

▪ For those that have savings, these are increasingly being used to service debt and to meet living costs, as the vast majority of the indebted battle, despite low interest rates. Consumer expenditure is down sharply in the monthly data releases, which will drive GDP to contract sharply in Q2.20, and we continue to expect by -48.2% qqsaa.

▪ The latest incoming BankservAfrica data further showed that “(t)he actual average take-home pay declined by -0.5% in real terms”, “overall employees received reduced salaries compared to a year ago and that less employees were paid”. “This strongly suggests tougher times for employees and their ability to spend.”

▪ Households were highly indebted before Covid-19, with savings low, but the severe prohibitions on a number of forms of economic activity during the different levels of lockdown has seen the situation worsen

dramatically to a crisis, with the worst yet to come for many households and corporates that run out of the savings they have been living on.

▪ The latest incoming data releases into June show that economic activity is still very suppressed on a year ago, evidencing a slower pace of contraction y/y for some indicators as opposed to any actual pick up. We continue to expect that GDP will contract by around -10% y/y overall this year, the worst contraction on record.

▪ In particular the clearing house highlights that “(t)he total value of take-home salaries paid in June declined by -25.6% … (,) total pensions paid dropped by -4.6% both in nominal terms. The combined decline for total take-home pay and pensions was by far the biggest on record at -23.5%!” (BankservAfrica).

▪ This provides early signs that consumer spending has weakened since mid-June as a result, with payments in the economy moving markedly lower. BankservAfrica clears and processes billions of low value card, ATM and EFT transactions annually.

▪ Our previous view that the vast majority of individuals in the private sector will receive much lower earnings this year (after tax, i.e. disposable incomes) compared to last year is currently being borne out, and that this will have deeply suppressing and lagged effects on GDP.

▪ Other data released a little earlier has shown a high number of individuals have lost their jobs in Q2.20 (up to 3 million estimated by the CRAM survey) and that almost all (89% of) individuals are concerned about their ability to meet their debt obligations (Transunion data).

▪ As we previously warned, lifting the remaining restrictions on economic activity, and even the lessening of restrictions in May and June will not see a sharp recovery. The ability of individuals to purchase goods and services has been greatly harmed, with 68% having said they can only survive one month by living on savings (Transunion data).

▪ The South African Reserve Bank’s coincident indicator also showed a collapse of over -20% (actually -27% y/y) in recent incoming data. The co-incident indicator indicates the level of economic activity experienced, recording the -27% y/y collapse in the month of April, and evidencing the lagged effect on incomes out to June in the BankservAfrica data.