South Africa’s Economy Has Taken Some Heavy Body Blows: Can It Recover?

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Economic cooperation is the linchpin of the US-SA bilateral relationship. Shutterstock

Economists are growing increasingly concerned about South Africa’s economy. This is because the country’s three major macroeconomic problems – lacklustre economic growth, growing inflation and very high unemployment – have been exacerbated by a series of major disruptions.

These include the COVID pandemic that started as a health crisis but escalated quickly to an economic crisis. Millions of people lost their jobs as economic activity came to a halt under lockdown.

In the middle of the pandemic violence that lasted for eight days erupted in Kwa-Zulu Natal and Gauteng. Further pressure has been piled on by Russia’s invasion of Ukraine which is pushing up food prices.

The most recent blow has been devastating floods in some parts of the country that caused loss of lives and massive destruction of infrastructure, including to the country’s biggest port in Durban.

These events hit an already fragile economy. The South African economy has been on the receiving end since 2009. It has, since then, never returned to its initial levels of economic growth pre-2007/2008 global downturn (financial crisis). The crisis is reported to have lead to job losses of about 1 million. Moreover, the economic growth saw a decline from 2011 onward due a decline in demand for commodities resulting from changes in commodity prices.

The continuous economic stagnation was further compounded by slow-paced investment. Other domestic factors that contributed to economic stagnation included restrictive macroeconomic policies and budgetary cuts.

Prior to the pandemic South Africa had entered into a technical recession – when an economy experiences economic decline in two successive quarters. Gross Domestic Product growth declined by 0.6% in quarter three and -1.4% in quarter four of 2019. The trend of low growth continued, becoming worse when COVID-19 hit.

The causal-effects of the disruptions

The pandemic: South Africa’s economy became more depressed during the pandemic because production in most sectors came to a halt due to hard lockdowns imposed in an effort to curb the spread of the virus. In the process various businesses shut-down temporarily, with others closing permanently. This resulted in job losses by millions of South Africans.

The violence: In July 2021, businesses, shops and warehouses were destroyed, looted and in some instances burnt in KwaZulu-Natal and parts of Gauteng. This disruption which lasted for eight days is reported to have cost the economy more than R50 billion as well as almost 2 million jobs.

The floods: The recent heavy rains in Durban and parts of the Eastern Cape caused major infrastructural damage. It also brought to a halt production in some sectors and even forced some businesses to shut-down. Many businesses affected were in the process of rebuilding after being destroyed during the July 2021 unrest. The closing of shops and businesses automatically translated into job losses, further exacerbating the unemployment rate.

The Ukraine war: Russia and Ukraine are both big players in global food markets in terms of production of barley, maize, sunflower oil and wheat. As a result the war will lead to slow growth in the global economy and accelerated inflation. South Africa is no exception as prices of food items such as oil and grain shoot up.

In addition, there is an upsurge in the prices of commodities and fuel which triggers inflationary pressures. This has led to the South Africa Reserve Bank increasing the repo rate on two consecutive occasions adding an extra pinch to the consumers’ woes.

The most obvious question that follows is if there is anything that can be done? The answer is yes.

What can be done

It is evident that since the global financial crises in 2008, South Africa’s economic growth has been on the decline. Specifically, growth has been on the downward trajectory with an average growth rate of just under 1.7% for the period 2008 to 2016 and worsened further below 1% for the period 2015 to 2016.

This trend of decline in economic growth negatively affected job creation to the extend that it translated into a jobless growth. This was evident in 2019, when South Africa experienced a technical recession, with little growth and decreasing levels of employment. It is more pronounced among young people. As such there is high demand for employment but low or limited supply of employment. This is due to the fact that potential employers are limited in taking on new employees or completely closing down because of the state of the economy and specifically the cost of doing business.

Moreover, the consumer’s purchasing power is deteriorating on daily basis due to high prices for food, electricity, interest rates (cost of borrowing) and many more. This is compounded by high inflation since 2018 which averaged 5.9%. This is the inflation rate South Africa is experiencing currently.

There is therefore a need to think of quick economic solutions to neutralise the problems of rising unemployment, rising prices and low economic growth.

First, South Africa needs to address the energy crisis because it is hurting already wounded businesses. Allowing an independent power producer into the energy market would be a good start.

Second, there is an urgent need to accelerate the creation of labour-intensive employment (in agriculture and tourism). More so, there is a need to revive industrial-based employment which has been on the decline over the years. This type of employment will be more inclusive.

Third, there are a lot of youth with entrepreneurial ideas. Hence, there is a need for proactive regulations (exemptions) that minimises barriers to small and medium enterprises entering the markets that are largely dominated by bigger firms.

These interventions could bring about inclusive growth.

In addition, the private sector needs to get involved in funding small and meduim enterprises as part of social responsibility or giving back to the community by empowering the entrepreneurial culture.

Finally, the government needs to address the problem of rising prices. It needs to administer the prices of some staple food as an additional intervention to the already zero rated items. Many of these are still expensive and unaffordable to many people. The administering of the prices can be temporary while working towards long term interventions.The Conversation

Johannes Peyavali Sheefeni Sheefeni, Associate Professor – Macroeconomics & Applied Econometrics, University of the Western Cape

This article is republished from The Conversation under a Creative Commons license. Read the original article.Economy

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