South Africa’s economy could sink by 7.1% this year: World Bank

The World Bank has published its latest Global Economic Prospects report for June 2020, paining a bleak picture for global growth amid the Covid-19 pandemic.

The bank’s baseline forecast for global growth shows a 5.2% contraction in global GDP in 2020, using market exchange rate weights—the deepest global recession in decades, despite the extraordinary efforts of governments to counter the downturn with fiscal and monetary policy support.

“Over the longer horizon, the deep recessions triggered by the pandemic are expected to leave lasting scars through lower investment, an erosion of human capital through lost work and schooling, and fragmentation of global trade and supply linkages,” it said.

“The crisis highlights the need for urgent action to cushion the pandemic’s health and economic consequences, protect vulnerable populations, and set the stage for a lasting recovery.”

For emerging market and developing countries, many of which face daunting vulnerabilities, the group said, it is critical to strengthen public health systems, address the challenges posed by informality, and implement reforms that will support strong and sustainable growth once the health crisis abates.

South Africa

In South Africa, activity is expected to contract by 7.1% this year – the deepest contraction in a century and 8% weaker than previously forecast – as stringent but necessary domestic containment measures, including an extended national lockdown, have severely disrupted activity.

Growth is expected to rebound in 2021, helped in part by the government’s announced 10 percent-of-GDP fiscal stimulus package to soften the impact of the pandemic and help set the stage for a robust recovery.

The recovery could gain further traction if planned structural reforms are implemented, including plans to improve public investment management and to encourage greater private-sector participation in infrastructure development.

However, prospects for faster growth over the medium term are likely to be constrained by needed fiscal tightening and will continue to be dampened by persistent power supply disruptions and the need for extensive maintenance and repair work on the national grid.

The World Bank’s forecast is lower than the International Monetary Fund’s last projection (April 2020), where it saw the country’s 2020 GDP outlook at -5.8%.

It could be worse

The World Bank warned that even this bleak outlook is subject to great uncertainty and significant downside risks.

“The forecast assumes that the pandemic recedes in such a way that domestic mitigation measures can be lifted by mid-year in advanced economies and later in developing countries, that adverse global spillovers ease during the second half of 2020, and that widespread financial crises are avoided.

“This scenario would envision global growth reviving, albeit modestly, to 4.2% in 2021,” it said.

However, this view may be optimistic, it warned.

“Should Covid-19 outbreaks persist, should restrictions on movement be extended or reintroduced, or should disruptions to economic activity be prolonged, the recession could be deeper.”

Here, businesses might find it hard to service debt, heightened risk aversion could lead to climbing borrowing costs, and bankruptcies and defaults could result in financial crises in many countries.

Under this downside scenario, global growth could shrink by almost 8% in 2020, the group said.

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