SA, one of the economies hit the hardest by the coronavirus pandemic and associated lockdown, will struggle to emerge from its deepest slump in about a century in the face of power cuts by Eskom and low demand, according to the Organisation for Economic Co-operation and Development (OECD).
The think-tank, whose members are the richest industrialised countries, downgraded its outlook for the country, saying GDP will shrink a huge 11.5% in 2020. That compares with the 7.3% forecast by the Reserve Bank, which is due to announce its latest interest rate decision on Thursday.
Such an outcome will have huge implications for the government’s ability to earn revenue and to narrow a budget deficit that’s set to breach 15%.
The OECD, which released its interim outlook report on Wednesday, was downbeat about SA’s prospects into 2021 because of load-shedding and a lack of internal demand, which will act as “bottlenecks to growth”, OECD senior economist Falilou Fall said.
“Household demand will remain constrained by higher unemployment and low, if any, income growth. We don’t see business investment picking up at a level sufficient to boost growth,” he said on Wednesday.
The revision is down from its June estimate for a contraction of 7.5%, and also worse than an 8.2% decline that was forecast under a more severe “double hit” scenario, which modelled further outbreaks of the pandemic later in 2020. It leaves SA with the worst expected outcomes for 2020 out of the countries included in the update, followed by Argentina, Italy, Mexico and India.
The revision is down from its June estimate for a contraction of 7.5% and is also worse than an 8.2% decline that was forecast under a more severe “double hit” scenario, which modelled further outbreaks of the pandemic later in 2020.
It leaves SA with the worst expected outcomes for 2020 out of the countries included in the update, along with Argentina, Italy, Mexico and India.
The OECD report followed the release of grim GDP data last week which showed the economy shrank 51% on an annualised basis, or -16.4% if not annualised. That fuelled speculation that the Bank could revise down its own forecasts and cut the repo rate by another 25 basis points, bringing reductions for 2020 to 3.25 percentage points.
The shock GDP outcomes have hastened the calls for much-needed reform to help reignite growth that was already weak before the pandemic shock.
In June, the OECD urged SA to tackle “structural bottlenecks”, in particular problems at Eskom, which implemented intermittent power cuts even during the lockdown, which closed down large parts of the economy.
The presidency announced on Tuesday that social partners at the National Economic Development and Labour Council had agreed on a recovery plan, which is to be considered and finalised by the cabinet.
Much of the OECD’s revision for SA in 2020 is the “carry-over of the slump” in quarter two, Fall said. The OECD also revised down SA’s forecast for 2021 to 1.4%.
The bleaker picture for SA comes as global GDP is projected to decline by 4.5% in 2020, before picking up by 5% in 2021. The drop in global grow is smaller than was expected in June but it is “still unprecedented in recent history”.
Lost momentum
Though global output recovered after the lifting of restrictions and reopening of businesses, the pace of global recovery has “lost momentum” in recent months and the outlook “is subject to considerable uncertainty”.
“The projections assume that sporadic local outbreaks will continue, with these being addressed by targeted local interventions rather than national lockdowns,” it said.
“However, a stronger resurgence of the virus or more stringent containment measures could cut two to three percentage points from global growth in 2021, with higher unemployment and a prolonged period of weak investment.”
The OECD said fiscal, monetary and structural policy support implemented by countries in response to the crisis, needs “to be maintained to preserve confidence and limit uncertainty, but evolve with underlying economic conditions”.
Large emerging-market economies with a credible macroeconomic policy framework can continue to provide support through a combination of monetary and fiscal policy easing. But some, like SA, that had high public debt and contingent liabilities or a low tax base would be constrained in their ability to use fiscal policy further.
That has shifted the burden of economic stabilisation to monetary policy. In SA, along with the government’s R500bn economic support package, the Bank has slashed interest rates to record lows and implemented various regulatory relief measures for banks, in an attempt to stimulate lending through the crisis. A rate cut on Thursday is likely, though the risk of the Bank staying put was “not negligible”, Jeffrey Schultz, senior economist at BNP Paribas, said in a note recently.
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