This week the South African government faced an impossible choice: risk a national health disaster by not taking firm steps to prevent the spread of Covid-19, or risk the severe economic impact of a national lockdown.
Ultimately it chose the latter, and the move has largely been welcomed. As Marius Oosthuizen from the Gordon Institute of Business Science argues, the seriousness of the situation demanded it.
“To put things into perspective, if South Africa’s 59 million people were to do nothing at this point, the country would require over 500 000 critical-care hospital beds – we currently only have about 5 500 of these, of which 88% are already occupied,” Oosthuizen notes.
“Fortunately, with the restricted movement being imposed through the lockdown, this number drastically decreases by 70%.
“This is the only way the country is able to reduce the chances of unmanageable widespread societal infection.”
For Isaah Mhlanga, chief economist at Alexander Forbes, the move also acknowledges what has worked elsewhere.
“If you look at what we have seen in South Korea and China, for instance, they managed to reduce the pace of infections because they took drastic measures,” he says.
“You could say that ideally South Africa should have taken this decision the day the first infection was discovered, but that would have been viewed as too drastic.”
Now, however, he believes that the right move has been made, even though the consequences will inevitably be severe.
“Unfortunately the very act of trying to slow down the spread of Covid-19 necessarily means that economic activity is going to be curtailed,” says Mhlanga.
“So we cannot save GDP,” he adds. “What I think they tried to do is to save lives, and cushion the impact on employment.”
“After the financial crisis of 2007 and 2008, we had a contraction in growth of about 1.5%,” Mhlanga points out. “If you use that as a benchmark, you are likely to see a contraction that is far larger than that for this particular crisis, which means 2% or even 3% is plausible.
“The 2008 crisis was a financial shock that translated into the real economy,” he points out. “This time around, you have a healthcare issue which disrupts the real economy first, and then the financial markets, which means there will be second-round effects.”
Johann Els, chief economist at the Old Mutual Investment Group, also expects a material slowdown. He is now forecasting that South Africa’s GDP will contract by 2% this year.
“While we hope to come out more strongly than this, the reality is a stark one in the short term,” he says. “The efforts so far taken by the South African government have to be applauded, but we need to face up to the fact that there will be severe economic effects.”
The other side
The critical question, however, is what happens after the lockdown is lifted. How quickly can the business environment realistically return to normal after such an episode?
Els believes “the economic impact is going to be severe, but short-lived” and suggests that this will be true for the local economy and the world more generally.
He is forecasting global growth in 2021 of 4.5% from -1.2% this year, and for South Africa to rebound to 1.8% growth next year.
“It is still not nearly enough to create the jobs and stimulate the higher levels of investment we need, but several green shoots are emerging,” says Els. “We have a president showing he is willing to make tough decisions and is being supported by a committed cabinet.”
However, others are less optimistic about the chances of a swift recovery. This is because there is no precedent for a nationwide lockdown, and its effects could still be felt for some time even after it is over.
For instance, there will inevitably be supply chain issues across the economy as some smaller suppliers and logistics companies may not survive. Those that do may also take time to ramp up production again.
Doing business internationally might also remain constrained, because South Africa can’t simply open up its borders again without the risk of the virus re-entering the country. If that happened, the 21-day lockdown would have been entirely in vain, and so some level of restrictions will have to remain in place.
Using some basic assumptions, Mhlanga suggests that even with the precautions taken, South Africa and the world generally will probably still be dealing with the virus for months. The negative impacts may therefore take longer to fully play out.
“What we have seen before is a V-shaped kind of recovery,” he says. “I don’t think we are going to see that this time around. In an optimistic scenario, we are going to see a U-shape, and if things are far worse, then it could be L-shaped – where we enter a slump for two to three years without recovery.”