- Growth forecasts before Covid remained below 2% for the next three years
- Sooner or later, South Africa would have approached the International Monetary Fund for a structural adjustment program.
- We would need economic growth of at least 4.5% per year for a very long time to make debt sustainable, and much higher economic growth than that to meaningfully reduce unemployment.
The years 2020 to 2023 will be lost for economic growth as it will not recover back to pre Covid-19 level at prevailing forecasts.
If growth permanently doubles the post Global Financial Crisis (GFC) average of 1.7%, it will not be until 2027 that the trend level will catch-up to that which would have prevailed in the absence of Covid-19 shock. Any growth rate that is lower than 3% means that there will be a permanent loss in income.
First let’s look at the general trend before Covid-19. Real economic growth averaged 1.7% per year between 2009 and 2019. However, in the five years to 2019, average growth moderated to 0.8% per year even as global growth grew north of 3%.
The internal deterioration in economic activity has been ventilated well and has been pointed at policy uncertainty resulting in low business confidence and low growth. The credit rating downgrades resulted in an increase in the interest rate burden for the state, which crowded out public investment. There is the dysfunctional SOEs that have also under delivered on their stated mandates while piling up and tapping into guarantees that further worsened the fiscal space.
With this backdrop, growth forecasts before Covid remained below 2% for the next three years. So as a counterfactual, I assume a trend level that is based on 1.7% average growth permanently, which is higher than the SARB’s potential growth estimates of 1.2% before Covid-19.
On this trend, real GDP would have risen from R3.1 trillion in 2019 to R3.8 trillion in 2030. At the current trajectory of the increase in debt, this growth trend would not be enough to make the debt sustainable, which will imply that the sooner or later, South Africa would have approached the International Monetary Fund for a structural adjustment program, which the ruling African National Congress has, since the dawn of democracy, vowed to avoid at all costs.
Covid-19 has hit growth hard and promises to leave a rearranged economy whenever its done with us, which experts say it can be some 18 months away. Let’s work with the SARB’s forecast and see what the future could look like. The central bank forecasts growth to contract by 7% this year, recovering to 3.8% and 2.9% in 2021 and 2022. If we round up the SARB’s terminal forecast and assume that growth will average 3.0% from 2023 onwards, the trend level GDP returns to 2019 level in 2022 and catches up to the pre-Covid-19 path only in 2027. Under this scenario, only the years 2020 to 2021 become lost years and there is no permanent income loss over the next decade.
Permanent loss in GDP
The second alternative is if the economy contracts by 10% this year and rise to the same SARB growth forecasts of 3.8% and 3.0% in 2021 and 2022. However, instead of stabilising at 3.0% permanently, let’s say growth moderates to 2.0% permanently. Under that scenario, the level of GDP only returns to 2019 level in 2024, which means we would have four years of lost GDP. Over the decade, GDP recovers to R3.6 trillion, which is R240 billion below the pre-Covid trend. This is a permanent loss in GDP.
The last alternative takes the most pessimistic scenario from National Treasury, which said growth could contract by 16% as a worst case. Maintaining the same growth forecast as in the second alternation - 3.8% and 3.0% in 2021 and 2022, followed by 2% permanently – GDP only returns to 2019 level in 2028, almost a decade loss in GDP with a R480 billion permanent shortfall compared to the pre-Covid-19 trend by the end of the decade.
What does this all mean? First, a growth of 2% or lower in the current decade will mean that GDP will be lower than 2019 levels for a very long time. Incomes and the quality of life will be lower for many South Africans as well.
Second, the deeper the contraction this year the higher the economic growth target we must have in order to recover to 2019 level quickly and to catch-up to the pre-Covid-19 trend by the end of the decade.
Third, South Africa needs a minimum of 3.0% permanently to bring back the old economy to its original path.
However, what we need is not the old economy for it is not sustainable. We would need economic growth of at least 4.5% per year for a very long time only to make the debt sustainable and much higher economic growth than that to meaningfully reduce unemployment. For this to happen, the infrastructure investment drive that is under way must succeed.
This will need patient capital that sits with pension funds and asset managers to participate and drive that investment. The government’s job in this is to create a conducive regulatory framework that it commits to enforce over the long term.
Anything that looks like the Gauteng Freeway Improvement Project or the inability of Eskom to collect electricity tariffs from some municipalities and townships will be the reason that will make the projects too risky and not conducive for private pension funds.