The K-shaped economic recovery

In August 2020, we postulated as to whether the recovery of the world economy would take the shape of a V- or a U- or an L. What we are seeing emerge instead is a K-shape recovery, where different parts of the economy and different countries recover at different rates and in different magnitudes.

A K-shaped recovery could transform the structure of the global economy as the paths of different sectors and markets diverge. For instance, we are seeing countries with faster vaccine rollouts, such as the US, rebound faster and stronger than poorer countries with uneven vaccine rollouts. This could exacerbate inequality between rich and poor nations, as US Treasury Secretary Janet Yellen, warned this week.

The South African Reserve Bank (SARB), meanwhile, expects the South African economy to show its own K-shaped recovery. Mining and agriculture have started to bounce back, while manufacturing finance, transport, construction and trade are yet to fully recover. There is also divergence between different groups of workers, with less-skilled workers being less protected than white collar professionals.

“Recoveries are also diverging dangerously across and within countries, as economies with slower vaccine rollout, more limited policy support, and more reliance on tourism do less well.”

– Gita Gopinath, chief economist for the IMF (in a recent blog post)

“The K-shaped recovery is just a reiteration of what we called the bifurcation of the economy during the Great Financial Crisis. It really is about the growing inequality since the early 1980s across the country and the economy. When we talk K, the upper path of the K is clearly financial markets, the lower path is the real economy, and the two are separated.”

– Joseph Brusuelas, chief economist at RSM

“Unlike most previous recessions, the recovery from pandemic conditions is uneven across sectors, raising the spectre of a K-shaped recovery. The Covid-19 recession is atypical: it differs from other recessions both in terms of its origins (policy directive) and in terms of its nature (a halt in activity for most of the economy).”

– From SARB’s April 2021 Monetary Policy Review

Global News

According to Pew Research Center data, 54 million people were pushed out of the global middle class last year as fates of countries diverged in a K-shaped recovery. It reports that the highest numbers of people falling out of the middle class were seen in South Asia, East Asia, and the Pacific.
In further evidence of a K-shaped divergence between countries, a scorecard of 31 metrics across 162 countries designed by Oxford Economics shows the Philippines, Peru, Colombia and Spain as the economies most vulnerable to long-term scarring from Covid-19. Australia, Japan, Norway, Germany and Switzerland were ranked as the best placed to show a speedy recovery.
The IMF, too, expects emerging-market and low-income economies to “suffer more significant medium-term losses” because they can’t throw as much stimulus at their economies as wealthier countries.
With reference to sectoral recovery divergence, as the UK moves out of lockdown, the commercial property sector is showing signs of slow renewal. Hammerson, one of the largest UK mall owners, was able to collect only 40% of its rent from tenants in the second quarter of its 2021 financial year. However, it expects this year’s rental collections to be better than last.
In more commercial property news, Bloomberg reports the number of troubled real-estate loans in the UK has climbed to the highest since the global financial crisis. There was a near 44% jump in defaults on commercial property debt, while under-performing loans rose to 8.6% of all outstanding loans.
In contrast to commercial property, the UK’s residential property market is faring much better. Property sales are at a 16-year high and house prices are soaring. More than 180,000 transactions were recorded in March (double the total in March 2020), while data from the Office for National Statistics (ONS) shows that the UK average house price rose by 8.6% over the year to February 2021.
Apple is positioning itself for a bounce-back in the commercial and education sectors as schools and businesses reopen. This week, it showed off a redesign of its flagship desktop iMac computer, featuring in-house designed chips instead of those made by Intel. The Mac line generated about $8.7 billion in revenue for the quarter up to December 2021.
Following the flurry of big cryptocurrency news last week, a trial of the Facebook-backed digital currency Diem (originally called Libra) will reportedly start later this year. Facebook has downscaled its ambitions to developing stablecoins pegged to different currencies from its initial plan of creating its own global digital currency backed by a basket of national currencies.
In more crypto news, British finance minister Rishi Sunak has asked the Bank of England on Monday to look at the case for a central bank-backed digital currency. Such a currency could potentially allow businesses and consumers to hold accounts directly with the central bank and make payments without a bank account with a retail bank.
Meanwhile the Turkish crypto exchange Thodex stopped operations and its CEO fled the country amid allegations that hundreds of millions of dollars were stolen. With the closing of the platform, the remaining assets of about 390,000 active users have been deemed “irretrievable”.
In a news flash earlier this month, we referenced US President Joe Biden’s plans to invest in ‘green infrastructure’. This week, on Earth Day (22 April), he recommitted to cutting US emissions nearly in half by the end of the decade, a target that would require transformative change to the American economy.
Last week, we noted that Britain now has one of the lowest Covid infection rates in Europe. On the other end of the spectrum, India is breaking the wrong sort of record with 314,835 new coronavirus cases reported in one day this week—the highest number of infections recorded in any country in a 24-hour period so far.

Local News

Echoing the Reserve Bank’s comments on South Africa’s K-shaped recovery, construction market intelligence firm, Industry Insight, reports that private sector building activity has slowed to its lowest level since 1994.
In recent weeks, we have commented on how South Africa is benefitting from a new commodities super cycle. According to Dr Roelof Botha, economic advisor to the Optimum Group, “so far this year, mineral sales have become even more rampant, with a further increase of more than 25% over the 2020 figure. To put the value of mineral sales of R120 billion during January and February into perspective, it is equal to the total output of the agricultural sector in 2020.”
In an article we wrote about how we expected the pandemic to change the business landscape in the short to medium-term, we predicted that work-from-home and cost-cutting would be notable trends. The effects are visible in the commercial property market. FNB’s commercial property broker survey results for the first quarter revealed that 65.5% of owner occupiers of commercial property were perceived to be selling or relocating because of financial constraints or pressures. It appears lockdowns and their effect on the office market, high office vacancy and poor rental yields are stifling recovery.
In other bad news for the property market, low interest rates and an oversupplied property market are forcing landlords to cut rental prices. TPN, which tracks various rental performance metrics, says that the number of buy-to-let properties standing empty across South Africa reached 13.3% in the first quarter, up from 7.5% in the first quarter of 2020. On the flipside, record-low interest rates appear to be driving purchases of residential investment properties, particularly those priced below R2 million.
Some good news on the commercial property front: the City of Cape Town has approved the R4 billion River Club mixed-use precinct, with Amazon’s African headquarters as the flagship tenant. This follows Amazon’s commitment to hire 3,000 more people in South Africa this year.
The rand is currently a top performer among emerging markets currencies. Leading global fixed income manager Pimco’s investment view offers a possible explanation of factors contributing to this phenomenon in the face of poor fiscal and debt metrics: “Specifically, we are focussing on five-to-seven-year durations in countries where yield curves are steep but anchored by monetary policy, allowing for real yields associated with fiscal or political contamination to be harvested. South Africa and Peru fall into this category.”
Relative rand strength is no doubt helping to keep inflation at the lower end of the SARB’s 3% to 6% target range. Stats SA says the consumer price index (CPI) accelerated to 3.2% in March from 2.9% in February, lifted by rising food prices. However, inflation is expected to remain subdued, meaning there is no pressure for interest rates to be hiked.
Resonating with a week of big news in international crypto, there were some interesting local digital currency announcements this week. Sygnia plans to apply to the JSE to list a new cryptocurrency exchange traded fund (ETF) in South Africa, while DCX Capital, which was founded by Earle Loxton and former CEO Michael Jordaan, is also planning to launch a Bitcoin ETF.
We recently shared an article by Professor Ivor Sarakinsky on the internal battles in the ANC. This week, ANC factional infighting continued apace. Read this article from Stephen Grootes for insight into how South African history shows that our politics has always been driven by a battle between two big personalities in the ANC.
On Wednesday, the ANC’s interim provincial committee in the North West suspended former premier Supra Mahumapelo’s party membership pending the results of the party’s disciplinary proceedings. He has been accused of advising a Northern Cape mayor, who has been accused of fraud, not to resign, which goes against the party’s “stand aside” resolution. The Daily Maverick reports that “it’s a move that can be seen as a test of the strength of the ANC’s Radical Economic Transformation (RET) faction”.