Prof André Roux: For SA’s economy, things will have to get worse before they get better
This opinion piece written by Prof Roux, economist and head of USB’s Futures Studies programmes, appeared exclusively in Business Day.
- Second wave stretched capacity of public and private hospitals to unprecedented extremes
- Finance minister budget speech in few weeks’ time must show serious intent to curb the accumulation of debt
- Given all available evidence, we should prepare ourselves for a period of severe economic hardship
The number of daily new Covid-19 cases and Covid-19-related deaths had declined significantly, a vaccine roll-out was apparently imminent, and the harshest constraints imposed by the hard lockdown had been removed. By and large, the much-beleaguered health care sector had – perhaps unexpectedly – seemed to have coped fairly well with the demands imposed on it.
We know, of course, that we have since been engulfed by the “second wave”, stretching the capacity of both public and private hospitals to unprecedented extremes. The numbers of daily new Covid-19 cases and deaths are higher than ever before, and the acquisition of the vaccines has been delayed. Moreover, there is uncertainty about the efficacy of the current crop of vaccines against a mutating virus. Lockdown level 3 was announced at the end of December, imposing renewed restraints on our social and economic mobility and interaction. In addition, the commencement of the new school year has been postponed by almost three weeks.
Sadly, therefore, South Africa’s near-term socio-economic outlook is bleak. Even without the disastrous impact of Covid-19, the local economy was floundering in the wake of a toxic blend of – mainly self-induced – structural flaws. These included negative economic growth, chronically high unemployment, a yawning income and wealth gap, and a poverty rate that is unacceptably high for an upper-middle income nation.
This litany of woes was created individually and collectively by, inter alia, high and rising levels of public and household indebtedness; unabashed and unpunished rent-seeking behaviour in the public and private sectors; an inefficient labour market; education and health care dysfunctionalities; an unreliable supply of electricity; an infrastructure backlog; and a general air of apathy, and an unfathomable appetite for mediocrity and ineptitude.
For now, two issues will have a major bearing on the short-term performance of the economy:
- The effectiveness of the health sector response in the next few weeks and months.
- The extent and effectiveness of (mainly) government-driven stimuli to galvanise both the supply side (production) and demand side of the economy.
Regarding the health sector response, it remains to be seen whether the recent hardening of lockdown measures will be sufficient to cope with the current and future demands for intensive care. Presently, the received wisdom discounts this possibility.
Meanwhile, the economic stimulus packages have been underwhelming. Thanks to its historically conservative stance, the Reserve Bank has been in a position to meaningfully relax monetary policy. The same cannot be said about fiscal interventions. Past fiscal indiscretions have created very limited scope for any meaningful injections. In fact, thus far, the Covid-19 stimulus package amounts to barely 2% of GDP. By comparison, the United Kingdom, France and the United States have injected resources totalling more than 10% of GDP into their economies.
The finance minister is scheduled to read his budget speech in a few weeks’ time. Normally, one would expect a government to adopt a stimulatory fiscal stance during times of severe economic hardship. Now, however, the “wriggle room” for substantive stimulating measures is virtually non-existent.
“This year’s budget must show a serious and plausible intent to, at the very minimum, curb the accumulation of debt.”
In fact, this year’s budget must show a serious and plausible intent to, at the very minimum, curb the accumulation of debt. This requires a marked narrowing of the budget deficit by restraining the growth in government spending and/or raising tax revenue. The former will compromise the well-being of the poorer members of society. Given the very low economic growth expectations, the chances of organic growth in tax revenue are slim; this means that government will only be able to generate higher revenue through (upward) adjustments to existing tax rates.
All things considered, therefore, the weight of evidence points toward a disheartening combination over the next few months of a drained health care system, and rather innocuous economic interventions. This will undoubtedly leave in its wake an indelible mark on the economy. To be sure, we might record an economic growth rate of 3% this year (2021), but coming on the back of an expected 8% contraction in 2020, this means that the economy (GDP) will still be significantly smaller by the end of this year than at the end of 2019.
After that, barring any major shock, a growth rate of barely 2% is on the cards. At best, therefore, aggregate economic activity will be restored to its pre-2020 (mediocre) levels towards the end of 2023/ early 2024 – a hard landing is virtually unavoidable.
“Given all the available evidence, therefore, we should prepare ourselves for a period of severe economic hardship.”
Given all the available evidence, therefore, we should prepare ourselves for a period of severe economic hardship. The economy will not come to a complete standstill, but we will see some awful numbers over the next few years; such as intermittent negative quarterly growth rates.
Amidst all of this, a number of tough and, in some circles therefore unpopular, initiatives need to be taken. For instance, fiscal realism is called for, with consumers, the business sector, workers, and the unemployed paying the price for past fiscal recklessness, foolishness, and indiscretions. In addition, the country’s leadership needs to deal firmly and decisively with the legacy of the first decade of this century. Included here are:
- The restoration of the autonomy and integrity of our democratic institutions (e.g., the Public Protector, the National Prosecuting Authority, the criminal justice system).
- Improving the country’s stock of social capital (trust, goodwill, shared values).
- Not just paying lip service to the notion of stamping out endemic corruption.
- The rebooting of state-owned enterprises (SOEs) – especially Eskom.
“Things will first have to get worse for a while before they get better.”
Difficult trade-offs will have to be made (especially in trying to balance efficiency with equity), and immediate results are unlikely to materialise. And the challenges are exacerbated by the reality of factionalism within the ruling party.
Things will first have to get worse for a while before they get better. But if the right strategic decisions are made with conviction and clarity of purpose and intent, 2021 might just be the year in which we learn from the home truths starkly exposed during the last few months.