Nobody knows with any degree of confidence how long the economic disruption caused by the responses to the Covid-19 virus will last. And just how much output and income and wealth (savings) will have been sacrificed.
The survival of any business that services crowds of people is gravely threatened as the Chinese lockdown approach to limit infections is widely adopted. Collateral damage to those enterprises and the large number of self-employed who depend on opportunities to earn income generated by airlines and airports, cruise ships, hotels, shops, restaurants, theatres, conferences, sporting events and their like — even retailers — will be considerable.
That includes damage to the banks and others who provide them with credit. The margin of safety for many businesses and the self-employed is always very narrow. They will need financial reserves as well as assistance from governments to survive the turmoil.
Perhaps as much of 10% of one year’s global incomes and output will be sacrificed to contain the coronavirus. This is an enormous sacrifice made to overcome a virus that, we are informed, is not that morbid and comes with limited mortality risk. More than 204,000 people around the world have been infected, with about 82,000 of that number recovered, and a global death toll of more than 8,200 [according to the John Hopkins University coronavirus research centre].
The number of victims will surely rise — perhaps treble — before the tide turns, if the Chinese evidence is relevant.
What we will never know with any certainty is how many infections and deaths will have been avoided as a result of the shutdowns. Some heartless economist will no doubt attempt to calculate the cost in GDP sacrificed for each death avoided — as well as the present value of the lives saved in the form of future earnings — and the narrow economic benefit of saving mostly old lives. It will be a very large number.
It is obvious that any such cost-benefit analysis has not informed policy in any way. Admirably, only potential benefits, numbers of lives saved, have driven the responses made. And taking the pressure off health systems that would otherwise have been overwhelmed by the number of supplicants has been the means to the end of saving more lives.
Spending power
Perhaps, when the dust is settled, the issue of how to develop a health system capable of responding to an emergency of this kind will be addressed — as a more effective solution than keeping people away from work.
It is, however, a generous response that only a relatively well-endowed society with a large reserve of spending power could possibly make. Without such a reserve to provide relief to those unable to earn any income, they would suffer terribly for want of life’s essentials. And using the reserve to keep businesses and banks afloat so that they can fight another day also makes good economic sense.
The government spending and financial taps are therefore being opened wide — wider than ever. Central banks are not only creating money to buy government bonds, they are also buying shares in businesses and securities issued by them. And they are offering loans on generous terms, not only to banks but directly to businesses.
Taxes are being relieved and postponed and access to unemployment benefits widened. Aid to businesses, such as airlines, will be provided on a large scale. The extra spending so facilitated will reduce the loss of output. It will help pay for itself.
SA and all too many South Africans have little by way of reserves against economic disasters. Our fiscal space is highly constrained, as our budget proposals have made clear. And raising debt to fund extra spending has become even more expensive for SA after the crisis.
Yet monetary policy in SA has lots of room to help our economy. There is room for the Reserve Bank to cut interest rates significantly and offer financial support for banks and businesses.
Our frail economy will need all the help it can get. Let us hope the Bank can think — must think and act — beyond the narrow inflation-fighting box to which it has hitherto confined itself.
Postscript: March 19 2020
The monetary policy committee has, alas, offered the economy nothing out of the box. It explicitly stays within its conventions and offers a welcome 100 basis point cut in interest rates.
It does not (yet) share the sense of emergency so apparent in the actions of its peers. Perhaps it will still be persuaded to do so.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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