The Covid-19 crisis is going to put South Africa’s economy into a deep recession. Finance minister Tito Mboweni believes that the economy could contract as much as 6.4%, and the budget deficit could swell to more than 10% of gross domestic product.
Much discussion revolves around the shape of the recovery. The Centre for Development and Enterprise (CDE) has published a new report: Are we asking the right questions about… The nature of the economic recovery?
The report argues that if “recovery” means “return to the growth trend evident before the crisis”, South Africa never recovered from the global financial crisis, and should not happen again.
It is very likely that the damage done by the epidemic will necessitate very significant economic reforms if South Africa is ever to fully recover, the CDE said.
“No-one knows what the long-term economic effects of the Covid-19 epidemic will be. The massive disruption attendant on a global lockdown has thrown supply chains into turmoil, pushed tens of millions of the workers into (at least) temporary unemployment, and caused financial markets to gyrate wildly.
“What is certain is that South Africa’s economy will shrink this year relative to last year. In this context, two key concerns for policy-makers, firms and banks is what effect it will have on South Africa’s economic output and how quickly will we recover,” it said.
Estimates of the size of the contraction range between 4% to 15% of GDP depending on whom you ask and whether you look at their most optimistic or most pessimistic scenarios.
South Africa post financial crisis
Between 1999 (the year after the Asian financial crisis) and 2008 (the year before the global financial crisis – or GFC), South Africa’s economy grew, on average, at around 4% annually.
That was brought to a crashing halt in 2009, when, as a result of the GFC – the economy contracted by 1.5%.
The effect of the GFC was short-lived, however: growth in excess of 3% in 2010 meant that the economy returned to 2008 levels within a year, and another year of growth in excess of 3% in 2011 suggested a return to parity, the CDE said.
However, since 2011, growth rates have declined almost annually. Growth has averaged 1.7% over the past decade – a nearly 60% reduction in average annual growth compared to annual growth in the decade before the GFC, the CDE said.
Annual GDP: 1995 to 20
South Africa’s failure to recover has been costly, the Centre for Development and Enterprise said.
One way to think about the cost of this is to think about how much larger the economy would have been had we returned to pre-GFC growth rates, it said.
It noted that GDP in 2019 would have been about R700 billion larger had our trajectory followed the pre-GFC trend, a figure that would have risen to R1 trillion over the next five years.
“Effectively, this means that between 2009 and 2020, South Africa missed out on aggregate output valued at around R3.7 trillion in 2019 rands,” it said.
In the first two scenarios, the economy returns to its pre-Covid trajectory (either in one year or over three years of recovery), but in three other scenarios, this does not happen.
In the first two scenarios, in other words, there is no permanent shock to GDP, though, of course, there is some lost output during the recovery-to-trend.
In the third scenario, however, a three-year recovery takes the economy back to the level of GDP 2019, after which is grows at the same rate as the pre-Covid trend.
“There is, in other words a permanent shock to South Africa’s income, with output each year lower than it would have been if there had been no Covid-related recession,” the CDE said.
Scenario four is even bleaker: here there would be a return to pre-Covid growth rates but without a rapid recovery to 2019 GDP levels and only after a two year recession, it said.
Are there reasons to worry that growth will not rebound?
“One of the most terrifying aspects of this crisis is the extent to which it threatens to decimate whole industries that employ tens or hundreds of thousands of people.
“Apart from anything else, disruption of global trade and value chains pose risks to growth to all economies. In addition, it is a reasonable bet that some industries will never wholly recover,” the CDE said.
It seems likely, for example, that aviation will emerge radically transformed, as will tourism, leisure industries (restaurants, sports events) and some aspects of retailing.
This will partly be a consequence of fundamental changes in the way goods and services of these industries are produced and consumed.
“But it will also be because there is a large probability that many firms will emerge so weighed down in new debt that they will struggle to survive and grow.
“In addition, hundreds of thousands of people may already have lost their jobs, and many more might lose them in the next few months. If their unemployment persists for any length of time, there is every reason to worry that skills and capabilities will decay, reducing future productivity,” the CDE said.
It warned that public debt is likely to weigh heavily on government and it will struggle to service the costs of that debt.
“If any of this turns out to be true, then there is every reason to worry that South Africa would have permanently lost some fraction of its industrial and commercial capabilities.”