The external environment in which we operate
Economic, social political and regulatory developments impact our business, while technological transformation is changing the world of work for all of us.
A number of issues in the external environment continued to have a material impact on our business during the year, creating a range of risks and opportunities.
Priority issues identified:
- Impact of COVID-19
- Economic developments
- Reputation of professional services
- Digital transformation
Impact of COVID-19 The COVID-19 pandemic has been a human, health, and economic crisis that has deeply affected the lives of many people around the world, including members of our PwC family, their relatives and friends. Our heartfelt condolences go out to all those who have lost loved ones during this difficult time. The pandemic has impacted everyone, amplifying and accelerating some of the biggest challenges in our society, and demonstrating the urgent need for systemic change in areas like social inclusion, the need for reskilling, the broader Environment, Social and Governance (ESG) agenda and the pressing challenge of climate change. These are all symptoms of a deeper problem: our economies are not delivering sustainable, inclusive outcomes for society. It is clear that businesses - including PwC - need to change and that is why we are focused on developing the capabilities needed to help build trust and help solve these very important problems. Looking ahead, the breadth and depth of the knowledge that we have at PwC and our ability to provide a comprehensive range of services have never been more important. There has never been a more pressing need to deliver wider assurance and rebuild trust. To help our stakeholders navigate tax and legal systems and to develop the workforces of the future. And to help our clients rethink and reconfigure their businesses for a changed world.
Economic developments
Having faced strong headwinds since the beginning of the year, the South African economy fell into a recession during the fourth quarter of 2019. Many structural constraints were to blame, although the impact of electricity load-shedding had an outsized impact on economic activity, investment spending, as well as business and consumer confidence.
Load-shedding is estimated to have cost the economy between R58bn and R119bn in lost output during 2019. Slower growth in key trading partners like China also weighed on the South African economy. Overall, the South African economy expanded by only 0.2% in 2019 as compared to a population growth rate of 1.4%. The finance, real estate and business services industry ― the economic category in which PwC is classified ― grew by a healthier 2.3% during the year.
In the broader economy, economic weakness continued during the first quarter of 2020, before the national lockdown. The South African economy expanded by only 0.1% year-on-year during the period. Agriculture and several services sectors were able to grow year-on-year during the period: the finance, real estate and business services industry, for example, was 3.1% year-on-year larger during Q1.
In contrast, the industrial sector ― in particular mining, manufacturing, utilities and construction ― continued on the negative trend seen at the close of 2019. A pandemic-induced slowdown in global trade and investment was one of the adverse factors faced by the South African economy during the first quarter of 2020.
South Africa was placed under strict lockdown conditions during the second quarter of 2020 to combat the spreading of COVID-19. With only essential services able to operate during April, and restrictions on most other industries during May and June, the South African economy contracted by 16.4% quarter-on-quarter and 17.1% year-on-year during the second quarter ― the deepest recession on record.
The South African economy contracted by 17.1% year-on-year during the second quarter of 2020 ― the deepest recession on record.
All industries except agriculture and government services were smaller year-on-year due to the lockdown, with mining, manufacturing and construction around a third smaller compared to 2019Q2. The finance, real estate and business services industry contracted by 6.6% year-on-year during the period, the smallest contraction amongst the negative year-on-year readings.
Figure 1: GDP growth: Slow growth followed by a deep recession in 2020Q2
Source: Stats SA
Looking to the future
PwC expects the South African economy to shrink by 9.3% in 2020. This takes into account economic data for the first three quarters of the year, the easing in lockdown restrictions during July and August, the positive impact of fiscal and monetary stimulus in reducing the recession, as well as the adverse impact of load-shedding on the recovery in economic activity.
We expect the worst of the lockdown effects to have passed with the second quarter, and the latter half of the year will see a start to the economic recovery. However, by the close of the year, the recession is still expected to result in a net loss of 1.4 million formal and informal sector jobs.
Following the 2020 recession, the South African economy is expected to grow by up to 4.5% in 2021, but off a very weak base. Expectations are for minimal restrictions on business activity by the start of 2021 and, later in the year, return of more international business and leisure travel.
Figure 2: GDP bounce-back forecast for 2021
Source: PwC analysis
The recovery could be aided by the implementation of key structural reforms to the economy, including the governance of electricity generation and distribution. This could address the issue of load-shedding, which is expected to remain a disruptive factor for the foreseeable future.
Our commitment to making a difference
The impact of COVID-19 has highlighted the profound structural economic and social inequalities faced by South Africa, which ultimately threaten the foundations of our democracy and the sustainability of our firm. We believe we have a positive contribution to make in addressing these issues, which is reflected in our support to Business Unity South Africa, Business for South Africa and the COVID-19 Solidarity Fund.
Reputation of professional services Public opinion in South Africa has been significantly impacted by the exposure of financial irregularities and corporate failure within the private sector and shocking revelations about the scale and mechanics of state capture in the public sector. In both cases, the spotlight has been turned onto the role auditing, consulting and legal firms have played in these controversies. As a predominantly audit and assurance business, we’re participating in industry-based initiatives to restore public trust in the profession. We understand the public wants to see the quality of audits improved, further corporate failures minimised, and faith restored. Although there is still more to do, the auditing profession is making progress in repositioning itself as a force of good and returning to its core professional principles of integrity, objectivity and due care. Find out more about how we engage stakeholders and focus on audit quality.
Digital transformation
Rapidly evolving technologies like artificial intelligence, cloud computing and robotic process automation continue to disrupt and redefine the personal, social and business environments. For PwC this has meant changing the way we operate and engage both our clients and people to meet their emerging needs and expectations. It has also enabled us to expand the range of services the firm offers in response to these growing technologies.
The implementation of the COVID-19 lockdown on 27 March gave us a unique opportunity to test the maturity of our digital transformation as well as the resilience and adaptability of our digital systems and people. The results have been extremely positive.
Find out more about how we’re inspiring our people, digitising our business.
Explore our Integrated Report 2020
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