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The Covid-19 crisis is going to put the South African economy into a deep recession. Finance Minister Tito Mboweni believes the economy could contract as much as 6.4%, and the budget deficit could rise to more than 10% of gross domestic product.
Much discussion revolves around the form of recovery. The Center for Development and Enterprise (CDE) has released a new report: Are We Asking the Right Questions About … The Nature of the Economic Recovery?
The report argues that if “recovery” means “returning to the growth trend evident before the crisis,” South Africa never recovered from the global financial crisis and should not happen again.
The damage caused by the epidemic is likely to require very significant economic reforms if South Africa fully recovers, the CDE said.
“No one knows what the long-term economic effects of the Covid-19 epidemic will be. The massive disruption of a global blockade has driven supply chains to turmoil, pushed tens of millions of workers into (at least) temporary unemployment and has caused financial markets to spin wildly.
“What is certain is that South Africa’s economy will shrink this year from last year. In this context, two key concerns for policy makers, businesses and banks is what effect it will have on South Africa’s economic output and how quickly we will recover, “he said.
Estimates of the size of the contraction range from 4% to 15% of GDP, depending on who you ask and whether you look at your most optimistic or pessimistic scenarios.
South Africa after the 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, by around 4% annually.
That stopped in 2009, when, as a result of the GFC, the economy contracted by 1.5%.
However, the effect of the GFC was short-lived: growth above 3% in 2010 meant that the economy returned to 2008 levels within a year, and another year of growth above 3% in 2011 suggested a return to parity, the CDE said.
However, since 2011, growth rates have decreased almost annually. Growth has averaged 1.7% in the past decade, a nearly 60% reduction in average annual growth compared to annual growth in the decade prior to the GFC, the CDE said.
Annual GDP: 1995 to 20
South Africa’s failure to recover has been costly, the Center for Development and Enterprise said.
One way to think about the cost of this is to think about how much bigger the economy would have been if we had returned to pre-GFC growth rates, he said.
He noted that GDP in 2019 would have been approximately R700 billion larger if our trajectory had followed the pre-GFC trend, a figure that would have increased to R1 trillion in the next five years.
“Indeed, this means that between 2009 and 2020, South Africa missed aggregate output valued at around R3.7 trillion in 2019 rands,” he said.
In the first two scenarios, the economy returns to its pre-Covid trajectory (either in one year or 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, although, of course, there is a loss of production during the recovery of the trend.
However, in the third scenario, a three-year recovery brings the economy to the 2019 GDP level, after which it grows at the same rate as the pre-Covid trend.
“In other words, there is a permanent shock to South Africa’s revenue, with production falling lower each year than it would have been had there not been a Covid-related recession,” the CDE said.
Scenario four is even bleaker: here would be a return to pre-Covid growth rates but without a quick recovery to 2019 GDP levels and only after a two-year recession, he said.
Are there reasons to worry that growth will not recover?
“One of the most terrifying aspects of this crisis is the extent to which it threatens to decimate entire industries that employ tens or hundreds of thousands of people.
“Apart from anything else, disruption of world trade and value chains pose risks to the growth of all economies. Also, it is a reasonable bet that some industries never fully recover, ”said the CDE.
It seems likely, for example, that aviation will emerge radically transformed, as will tourism, the leisure industries (restaurants, sporting events) and some aspects of retail.
This will be in part a consequence of fundamental changes in the way the goods and services of these industries are produced and consumed.
“But it is also because there is a high probability that many companies will emerge so indebted that they will have difficulty surviving and growing.
In addition, hundreds of thousands of people may have already lost their jobs, and many more could lose them in the coming months. If your unemployment persists for an extended period of time, there are many reasons to worry that skills and abilities will deteriorate, reducing future productivity, “said the CDE.
He warned that public debt is likely to weigh heavily on the government and will have difficulty paying the costs of that debt.
“If any of this turns out to be true, then there are many reasons to worry that South Africa has permanently lost a fraction of its industrial and commercial capabilities.”
Read: Mboweni on the economy, the Land Bank and asking the IMF for help
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