South Africa’s economy will contract severely this year as the impact of drastic global measures to contain the spread of Covid-19 tips the entire world into a recession and raises the risk of a depression, which is a severe economic downturn that lasts for several years.
The decision to put the entire country into a three week lockdown from 26 March was taken to prevent a humanitarian disaster well beyond the scope of SA’s health sector, which is ill-equipped to cope if the disease spreads into poor, densely populated areas where people are the most vulnerable.
Lockdowns had already been imposed in all of SA’s main trade partners – the US, Europe, and the UK – following China’s success in containing the pandemic with restrictions that other countries initially viewed as too draconian in Wuhan province, the epicentre of the outbreak.
India shut down its economy the day after President Cyril Ramaphosa’s announcement, taking the number of countries in lockdowns to 20.
What this means is that the engines of most of the countries that drive the global economy have ground to a halt, and governments have resorted to costly measures to keep their economies afloat. SA was forced into the same predicament, and with an economy already in recession and limited fiscal resources, the impact will be severe.
“The timing of this is very unfortunate,” said Sipho Pityana, the chair of Business Unity SA and miner AngloGold Ashanti. “The mitigation steps we have agreed with government are the best we ca ndo under the circumstances – they are just about softening the blow.
“My view is that we don’t have a full handle yet of the real impact and the real consequences of this virus on the economy,” he added. “There is no doubt that there are going to be some business failures, there are going to be jobs shed, and the recovery process is going to be much tougher than many of us are ready to accept.
”A growing number of analysts predict that SA’s economy will contract by up to 5% this year, far more sharply than it did during the global financial crisis more than a decade ago. Its budget deficit will explode as tax revenues fall well short of expectations and the government steps up borrowing to alleviate the impact of the crisis and to cover rising debt costs.
The outcome will be even more severe if the lockdown has to be extended or imposed again, which is likely given the behaviour of the virus so far. China’s lockdown was imposed in late January and its restrictions will only be completely lifted in early April. “This year is going to be carnage,” said Intellidex economist Peter Attard Montalto.
“With the three-week lockdown we think there’ll be a contraction of between 5% and 6%.” His forecast for SA is one of the most pessimistic, but Standard Bank predicts that economic output will drop by 5%, while UK-based Capital Economics forecasts a contraction of 4%. Given the anticipated plunge in revenues, SA’s budget deficit is now likely to swell to more than 10% of GDP, from a February Budget estimate of 6.8%, several analysts believe.
The debt-to-GDP ratio is likely to soar well above 70%, from an official forecast of 65.6%. Job losses could amount to 500 000, with small and medium-sized companies hardest hit. But the rest of the world is in the same position. Goldman Sachs chief economist Jan Hatzius said on 20 March that the global economy was not just experiencing a recession, but a sudden stop without precedent in post-war history.
He warned that US GDP would plummet by an unprecedented 24% in the second quarter of this year, in spite of a $2tr stimulus package from the government and the Federal Reserve’s decision to slash interest rates to nearly zero. James Bullard, president of the Federal Reserve for St. Louis, sees a contraction of a similar magnitude and predicted on 22 March that the US jobless rate could leap to 30%, from 3.5% in February.
The problem is that the crisis is unfolding so rapidly that forecasts are being revised every day, S&P pointed out in a research note on 24 March. The Institute for International Finance slashed its estimates three times in March, and now predicts the global economy will shrink by 1.5% this year.
Kristalina Georgieva, managing director of the International Monetary Fund (IMF), said on 20 March that the economic hit from the Covid-19 pandemic would be worse than during the global financial crisis. “The economic impact will be severe, but the faster the virus stops, the quicker and stronger the recovery will be,” she said.
The IMF has said it is working closely with other international financial institutions to provide a strong coordinated response and is ready to deploy all of its $1tr lending capacity. World Bank Group president David Malpass said on 23 March that the lender was ready to spend $150bn in resources over the next 15 months to help developing countries fight and recover from the pandemic.
He also called on creditors from the G20 group of developed nations to allow the poorest countries to suspend all payments on bilateral debt while they battle the crisis. Emerging economies have been particularly hard hit by huge outflows from their debt and equity markets, and the theory that they are facing a “sudden stop” in capital inflows has begun to gain traction.
SA is no exception – the exodus of capital (outflows) has knocked the rand to record lows, taking its depreciation this year to about 20%. Plunging oil prices and declining economic activity mean this is unlikely to ignite inflation, giving the SA Reserve Bank (SARB) ample room to cut interest rates further after slashing its key repo rate by a full percentage point to 5.25% on 19 March.