SA failed to return to its healthy pre-crisis growth path after the 2008 global financial meltdown. Instead, its growth potential more than halved. Covid-19 has further eroded that potential by destroying firms and jobs, fuelling concern that the country could take longer to recover from the pandemic than most.
Globally, the initial pick-up in activity has mostly been rapid, though fears of a second wave of infections and consumers’ innate caution are likely to prevent a fully V-shaped recovery around the world.
According to Bloomberg consensus forecasts for real GDP, a third of countries will have recovered to their 2019 level of output by 2021, rising to three-quarters of countries by 2022.
Only a quarter of countries, including SA, will take longer.
The Reserve Bank expects SA’s real GDP to revert to fourth-quarter 2019 levels only in the first quarter of 2023.
In a research note, Capital Economics identifies at least four factors which will probably determine how soon a country can expect to recover. Unfortunately, SA is on the wrong side of all of them.
The first is the country’s policy response to the pandemic. As a rule, heavier lockdowns have done more economic damage than cautionary behaviour exercised voluntarily.
Countries like SA that have employed tight, extended economic restrictions, including outright prohibitions, are likely to take longer to recover because their economies must rebound from an unusually weak starting point.
The situation is compounded in SA by extremely low levels of business and consumer confidence, and the fact that even before the crisis the country was in a recession and its potential growth rate had fallen to about 1%.
The second factor hinges on economies’ sectoral composition. Countries with bigger retail, tourism and hospitality sectors have been hardest hit. SA’s travel and tourism sector, contributing roughly 8% of GDP, is relatively important.
The combined trade, catering and accommodation sector accounts for just under 14% of all economic activity in SA.
These sectors are likely to continue to be affected by social distancing, and vulnerable to renewed outbreaks, says Capital Economics. And with less international travel, it will probably take years for tourism sectors to get back on their feet.
The third element is the scale and speed of fiscal support offered during the crisis.
"Advanced economies have generally been a lot more generous with direct giveaways, such as tax breaks and income support," says Capital Economics. This is partly why their recoveries are likely to be firmer than in most emerging markets, where limited fiscal space and tight external financing conditions have constrained governments’ responses.
In some cases, like India and Brazil, governments were simply slow to act. In SA’s case, while the government’s R500bn relief package initially looked impressive, it has battled to dispense timely relief due to bureaucratic constraints. Moreover, firms have been reluctant to take advantage of the R200bn credit guarantee scheme, partly due to design flaws.
The fourth factor likely to determine countries’ relative recovery rates is the strength of government, corporate and household balance sheets going into the crisis.
While Capital Economics expects most countries to be able to manage their higher public debt burdens without the need for austerity, SA is not one of them. Tighter fiscal policy following the crisis will further constrain the pace of SA’s recovery.
Though SA’s sovereign debt level was unsustainable before the crisis, the corporate and banking sector was generally in a sound position while households had managed to deleverage slightly since 2008.
However, after a decade of feeble growth, few households or firms have been able to build income buffers strong enough to withstand the ravages of a pandemic.
The upshot is that SA is likely to experience a prolonged period of weak demand after the crisis as the government, households and business are forced to restrain spending and suspend investment to repair their balance sheets.
Insofar as firms remain closed, sectors shrink, investment is delayed or cancelled, and stubbornly high unemployment causes skills to atrophy, the Covid-19 crisis could reduce trend growth by further eroding SA’s capacity to produce goods and services.
So far, incoming real GDP data confirms that SA experienced "a deep, harrowing contraction" in the second quarter. This was significantly worse than the consensus expectation of 39.2% quarter on quarter, according to Investec chief economist Annabel Bishop.
She forecasts a contraction of 48.2% q/q in the second quarter (and about 10% for the year as a whole), noting that industrial production (mining, manufacturing and electricity generation), which makes up around 21% of GDP, plummeted by over 73%, retail sales by 66% and wholesale sales by 59% in the second quarter compared with the first quarter.
Stanlib chief economist Kevin Lings notes that when viewed over the year to June, SA’s retail sales were almost 10% below the level of activity that prevailed prior to Covid-19.
While he expects the sector to bounce back to pre-crisis levels in the first half of 2021, aided by South Africans’ high propensity to shop, he warns that "the road to recovery will not be easy or rapid".
Lings is concerned about the effects of extensive job losses, tighter bank lending conditions as well as a moderation in household income growth, especially among lower-income groups.
On the other hand, he says many in the formal sector are enjoying a rise in discretionary spending thanks to lower interest rates, big petrol price cuts, and fewer work-related expenses, such as travel and clothing.
Despite these mitigating factors, he argues that there is no substitute for job creation as the key to long-term sustained economic growth.
Western Cape premier Alan Winde expects employment to drop by 8.4% in the province in 2020, and then to grow by just 1.9% in 2021 — a major net loss. The province’s tourism sector alone is expected to shed 104,504 jobs (60% of its workforce) this year.
Economists’ growth forecasts vary widely, given the deeply uncertain outlook. The National Treasury expects real GDP growth to contract by 7.2% this year, followed by an artificial bounce to 2.6% next year on statistical base effects, before tapering off to just 1.5% in both 2022 and 2023.
"It’s the slowdown in the outer years that explains why SA could take so long to get back to pre-crisis levels," says Hugo Pienaar, chief economist of the Bureau for Economic Research (BER), who has a similar forecast.
He doesn’t expect the level of real GDP to recover to SA’s pre-crisis level before 2025. The main reason is that he assumes that the government will fail to deliver a huge, rapid infrastructure drive or green energy push.
"It’s not that nothing will be done, but we’re not assuming quick, easy implementation. One doesn’t see enough oomph in terms of policymakers’ understanding of the severity of the crisis," he says, citing the fact that the government plans to open bid window 5 of the renewable energy programme only in the second quarter of 2021.
"If we saw quick, dramatic government intervention then we’d change our story. But until we see it, scepticism will prevail."
The global economy is rapidly picking itself up but SA’s recovery is likely to be extremely slow
— What it means:
The BER is also worried about the extent of business closures and how long it could take new firms to fill these gaps in a demand-constrained environment. And then there’s the resumption of load-shedding, which Eskom warns could continue for at least another year.
"All in all, the pre-Covid growth constraints haven’t gone away and, on top of that, you have this 100-year shock which has exacerbated everything, so it’s going to be extremely hard for us to recover," says Pienaar.
Citibank economist Gina Schoeman thinks SA will be lucky to be growing by 1% in 2022. She warns that unless SA institutes substantial pro-growth economic reforms, the country will still look as depressed as it was in 2018 or 2019 by the time 2022 rolls around.
Her fear is that, in the absence of a strong reforming president, SA could get stuck in a low-confidence, sub-investment-grade environment dogged by political and policy uncertainty. This would add to SA’s high risk premium and push up interest rates.
When she combines SA’s poor reform prospects with the "semi-permanent" destruction of jobs and firms as a result of the crisis, and the resumption of load-shedding, "it doesn’t give you an economy with the potential to do much more than grow at 1%".
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