The year has barely started and gross domestic product (GDP) growth forecasts are being revised lower. Why is growth weakening?
Load shedding, which hit GDP in the last quarter of 2019, triggering a recession, is usually one of the first culprits to be identified, although the modest gain in mining GDP in the quarter is an interesting development.
Whereas we have a reasonable handle on the impact of electricity outages on GDP growth, the same cannot be said for the spread of the coronavirus (Covid-19).
If the severe acute respiratory syndrome outbreak of 2003 is a reliable guide, the near-term hit to global growth should be followed by a V-shaped recovery. This would have a limited impact on global economic activity and the South African economy for the year overall.
The global manufacturing and service purchasing managers’ data for last month confirms that a material slowdown in growth is unfolding. It is severe, led by exceptionally weak data in China. And it could intensify.
V-shaped or U-shaped?
Does the available data suggest that a V-shaped recovery is plausible? On the plus side the daily increase in reported Covid-19 infections in China has slowed to close to 0 percent, while the number of active cases in the country is about half the cumulative number of infections recorded. Further, anecdotal evidence and some (although by no means all) high frequency data releases suggest China’s economy is slowly preparing to return to production.
However, as the virus has continued to spread globally over the past week, it seems increasingly likely the impact on the world economy may be more prolonged and deeper than initially thought. Perhaps the recovery will be U-shaped, rather than V-shaped. But, either way, in the base-case scenario the global economy is expected to recover in the second half of this year.
If so, the impact on South Africa is expected to be negative, but partially contained, as we rely on the flexible rand exchange rate to act as a shock-absorber, supported by monetary policy easing, as the collapse in oil prices should help to contain inflation.
The problem is South Africa’s current potential growth rate is so low and its unemployment situation so dire, that even a small hit to economic activity is keenly felt.
Also, it is likely that further worsening of South Africa’s unsustainable fiscal position could constrain the extent to which the Reserve Bank responds.
Dearth of information
Economists are at a disadvantage when analysing epidemiological events. There are many moving parts and a dearth of important information. What is the true transmission rate of the virus? Are the number of infections substantially under-reported? What is the true mortality rate? Is it significantly lower than reported, or not?
The risk of transmission through the world may be higher than we think, and it is possible Covid-19 may spread through the northern hemisphere in the months ahead, before permeating to the southern hemisphere as we head towards the winter season here.
Much now depends on behavioural patterns. Assuming individuals go about their daily work and domestic lives as usual to pay the bills, “normalisation” of economic activity and human interaction is likely in the months ahead, in which case the global economy will recover this year with relatively limited damage.
On the other hand, if, as is the case in Italy, the nascent clampdown on transport, tourism, trade and events intensifies as the virus and associated news spread, and if more and more consumers in an increasing number of countries seek to limit human contact and reduce discretionary consumer spending, the negative impact will probably be prolonged. If so, it is likely that the impact of the virus on economic activity will not unfold in a neat, predictable fashion.
One would expect further downward revisions to growth forecasts, a disinflationary impulse in the near term, interest rate cuts, the use of central bank balance sheets and, probably, fiscal loosening.
In the absence of sufficient information, the view is as clear as mud.
The collapse in oil prices helps the terms of trade, but, either way, the outlook for the South African economy remains severely constrained, as the outbreak has arrived when our economy is weak and vulnerable, against the backdrop of an unsustainable fiscal position.
In the interim, there is an argument to be made that monetary policy easing abroad is creating room for South Africa. An interest rate cut looks likely next week. Our deteriorated fiscal position may give pause for thought, but possibly only temporarily. This consideration may merely limit the extent of the expected cut in the Reserve Bank’s repo rate.
Arthur Kamp is the chief economist at Sanlam Investments.