2 economic scenarios South Africa could face in the next six months: analysts

The Organisation for Economic Co-operation and Development (OECD) has published a new analysis focusing on how the coronavirus pandemic will impact economic recovery efforts around the world.

The group notes that the global economic outlook is “exceptionally uncertain” and that recovery efforts could be interrupted by another coronavirus outbreak if targeted containment measures are not put in place or prove ineffective.

As such the OECD provided two equally likely scenarios for each country and economy – one scenario in which a second outbreak occurs in all economies towards the end of this year (double-hit) and an alternative scenario where the second outbreak is avoided (single-hit).

“In the double-hit scenario, global GDP is projected to decline by 7.6% this year and remain well short of its pre-crisis level at the end of 2021; in the “single-hit” scenario, world GDP is projected to decline by 6% this year, but will have almost regained the pre-crisis level at the end of 2021.

“Even so, in many advanced economies, the equivalent of five years or more of per capita real income growth could be lost by 2021,” the OECD said.

South Africa 

The OECD noted that the Covid-19 outbreak adds to South Africa’s already severe economic challenges, with depressed growth, large fiscal deficits, increasing debt and high social vulnerabilities.

“In the double-hit scenario, a new virus outbreak affecting South Africa and its trading partner countries will curtail exports, deepening the reduction in GDP to 8.2% in 2020 and limiting the recovery in 2021, with GDP growth at 0.6%,” it said.

“Persistent electricity shortages, rising government debt and policy uncertainty will continue to hold back investment and production.”

In the single-hit scenario, the OECD said that economic activity will fall by 7.5% in 2020 before picking up progressively with GDP growth of 2.5% in 2021.

Bottlenecks

The OECD said that South Africa’s prolonged period of very low activity during the lockdown led to a collapse of production both in the service sector and in manufacturing and mining.

“In the double-hit scenario, this is then followed by a renewed fall in activity and exports in the fourth quarter of 2020.

“The government rescue plan will mitigate the fall in household consumption but investment, which has been declining over the past two years, will decline to a record low level,” it said.

In the single-hit scenario, the depreciation of the rand that has already taken place, driven by deteriorating fiscal accounts, will not boost exports as commodity demand remains weak, though prices of some commodities (gold, platinum) are high, the group said.

The OECD added that high production costs will continue to weigh on economic activity and that load shedding by power utilities remains a key domestic risk.

“On the other hand, a faster recovery in China would have growth spillovers for South Africa, including through higher demand and prices for commodity exports,” it said.

Financing efforts should continue 

The OECD said that measures targeting vulnerable households should continue if needed after the initial six months, in particular if there is a further virus outbreak.

“In the sectors hardest hit (tourism, restaurants, etc.), support to firms should be prolonged until their activity recovers.

“Financing this rescue plan can be afforded by partnering with international financial institutions and borrowing in the domestic financial market while the Reserve Bank supports liquidity in the debt market.”

However, the paramount reform needed to unlock the potential of the economy and bring back confidence is to tackle the challenges of key state-owned enterprises, particularly Eskom, the group said.

“Such reforms are urgently needed to create conditions for the return of investment and growth and to restore fiscal sustainability.”

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