GDP shrinkage of 12%: It’s not the virus, but the lock-down, stupid!

Johannes Wessels (@johannesEOSA1) & Mike Schüssler (@mikeschussler)

At the end of the initial 3 weeks lock-down a GDP decline of about 5% was considered as quite a catastrophic outcome. Even at that level, it was considered worth the price since delaying the spread of the Covid 19 virus would give a window of opportunity for the health sector to get beds, ventilators and care protocols in place for the spike that would inevitably come.

The minister of trade and industry (dti), Ebrahim Patel, however dismissed the negative projections of economic shrinkage as mere “thumb-sucking”.

After prolonging the hard lock-down with just a gradual easing to level 4 to end May, the growing queues of the hungry waiting for food parcels, the increase in the claims from the unemployment insurance fund and the drastic shrinking of the state’s purse, would make a 5% decline in GDP a dream outcome.

The GDP figures for Q1 2020 will only be known end June. Data from other countries indicate that those whose governments had opted for a hard lock-down are in for excessive economic damage.

Change in GDP trend is the difference between growth in 2019 and 2020 1st quarters, implying that the Philippines that experienced a change of -6% went from 5.9% GDP growth in Q1 2019 to -0.1% in Q1 2020. This chart reveals the following:

  • Countries with a hard lock-down that kept only essential services and providers open, saw an average decline of 5,2% in GDP trend.
  •  Those with a lock-down which allowed many other sectors (other than restaurants, bars, etc.) to operate, saw an average change in GDP trend of 3.4% less than before.
  • Countries and regions with a mixed response saw a similar decline to those with a milder lock-down with an average change in growth of 3,4% less.
  • The countries that implemented only social distancing and kept number of people down to less than 50 at events, had a GDP growth rate of 2% less.
  • Countries with only track and trace with small area closure, such as Taiwan, had GDP had on average 0,9% less growth in GDP than before.

The evidence is simply that GDP in hard lock-down countries (like South Africa) seems to have sunk substantially more than either those with a milder lock-down or those that only practised social distancing. What is the local situation?

SA has to win the lotto to record positive growth

Consider that the local lock-down commenced in the ten days of 2020 Q1 was already problematic due to that eternal virus of inefficient SOEs that on the one hand deliver unreliable services (think load-shedding, delayed SAA flights and high-tariffs-low-productivity ports) whilst having the begging bowl in the other hand for additional bail-outs by the taxpayers.  The chances are better for Bafana-Bafana to win the World Cup in 2022 than for GDP to be positive. (And remember that any GDP-growth rate below the population growth rate boils down to impoverishment.)

Add to that a rock-hard lock-down for a full two months in 2020 Q2 with the detail of level 3 as from June 1 still uncertain, and a decline far exceeding the 5% mark is on the cards.  With estimates of a daily cost of about R7.4 billion per day, the 61 days of hard lock-down of phases 5 and 4 could amount to R486 billion (about 9.35% of GDP). 

The month of June with more sectors re-opening, will be better than April and May, but demand will – after an initial spending spree on especially liquor – remain depressed.  The reasons are obvious: consumption expenditure is under pressure due to:

EOSA’s definition of a formal enterprise is on our home page
  • an additional 3 million individuals have joined the ranks of the unemployed to date;
  • tens of thousands are on reduced salaries and benefits;
  • more than a million formal enterprises rather devoting their reserves in attempts (and for a large percentage it will be futile) to rescue their businesses;
  • large segments of the economy (tourism, hospitality, personal services, e.g. hair dressers) remain closed.

A month ago, National Treasury made a presentation to Scopa that indicated scenarios of the lock-down.  That presentation was to a large degree based on the work of a research project called Towards Inclusive Economic Development (TIED). TIED involves staff from Treasury, the dti, SARS, the Department of Monitoring, Planning, and Evaluation, the United Nations University World Institute for Development Economics Research (UNU-WIDER), the Delegation of the European Union to South Africa, the International Food Policy Research Institute (IFPRI) and some universities.

Profound economic implications

TIED’s initial analysis of the impact of Covid 19 on the South African economy concluded:

  • the lock-down measures decided upon by government have “profound economic implications”, and
  • the implications of the global economy on the local economy, whilst “very large by any number” are not as severe as the effects the lockdown measures.

The “thumb-suckers”, some working in Patel’s own department and others at Treasury and SARS, put their finger on the wound: whilst Covid 19 illnesses and deaths with the resultant health costs would have had an impact on productivity as well as on demand, the real damage to the economy is inflicted by the lock-down strategy that was followed.

TIED reckoned a quick lock-down of 21 days would have seen GDP decline of about 5,4% with a short lock-down (eight weeks) resulting in a 12,1% decline. A prolonged lock-down might imply a decline of 16.1%.

South Africa will move from level 4 after almost 10 weeks in hard lock-down. Whilst it is uncertain how long level 3 will be maintained, even levels 2 and 1 will not be back-to-normal.  The 12.1% decline, as calculated by TIED, at this stage appears to be the optimistic scenario with their worst case of a 16.1% decline becoming all more likely.

One-dimensional view

This is the outcome of a governmental decision based on a distorted one-dimensional view that everything should make way for a health response rather than a balanced holistic approach. It is as if the negative implications for public health system of such a dramatic decline in GDP has never been considered.

Patel may again refer to this figure of a decline in excess of 12% as a thumb-suck.  Well, China as the country that experienced the first outbreak and also introduced extreme lock-down in the affected parts, also reported their GDP figures for Q1 2020. Their GDP trend was a massive swing of -13.2%, moving from 6.4% in Q1 2019 to -6.8% in Q1 2020.

Due to anti-growth government policies, aggravated by uncontrolled state plunder for which not a single successful prosecution has as yet taken place, South Africa had not the buffer of positive growth that cushioned China, the Philippines and Malaysia. The impact of lock-down will therefore be a substantial shrinkage in Per capita GDP.  

Per capita GDP will take years to reach the 2014 level again

GDP growth is needed to help people recover from this crisis. To illustrate this: if South African GDP declined with say 6,4% the Per capita GDP will reach it previous (2014) level only in 2031 (assuming an average annual growth rate of 2.5% after a strong recovery of 4% in 2021). If GDP declines with 16.1%, which is now far more likely, the per capita GDP only reaches the 2014 level again in 2045.

A 20% GDP decline in 2020 will take GDP per capita down to a level last seen in 1967.

A long shadow

South Africans will be much poorer, and poverty will increase. Our policy response of using a bazooka when a surgical instrument was required, makes matter far worse for a lot longer.

University funding, social grants and hospital services will see massive cutbacks. Even basic education would see more children in a class than now.

Point is: the lock-down added to the economic decline and the impact is nowhere close to over. The current economic response of pouring money at the economy helps in the short-term but sadly leaves our children to pay off the debt.

It will linger and be with South Africans for decades.

There are no easy answers but just focusing this much on a single problem and the response to it has destroyed much of our children future as the unemployment queue will be at least three million longer in the next while.

The gradual opening by forcing the economy through stages despite the growing evidence of economic destruction, reveals a deep-rooted perception that the economy can just be bent and shaped according to central government’s wishes.

Unfortunately, as a currency that devalues cannot be picked up from the floor as if it is a dropped coin, despite Nomvula Mokonyane’s ministerial claim that it is possible, a severely damaged economy can also not regain momentum without the rebuilding of an enterprise-friendly environment that will in turn bring about both investor confidence and consumer spending.

And the government is still mum about not only structural reforms, but also about its policies of insisting on maintaining state monopolies on electricity distribution, rail-freight and the ports, as well as BEE. This toxic mix that stunts economic growth, requires rapid change.  

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