How is South Africa’s financial economy affected by the recessions of other countries?

It is often said that when the world’s major economies sneeze, it is often smaller economies that catch a cold. In the case of the Covid-19 pandemic, it was more like the whole world caught the flu.

We often talk about the South African economy as if it somehow lives in isolation from the rest of the world, but the world economy is similar to a living, breathing ecosystem. Different countries and markets are like organisms, affected by changes in their environment. This means sometimes things come along that affect and disrupt the whole ecosystem, such as the current pandemic or the 2008 global financial crisis.

But what exactly is a recession? And just how does something that happens across the ocean, affect South Africa? What real-life impact do those numbers we always see on the news have on the man on the street? Before we dive in, here are some common terms you need to know:

• Gross domestic product (GDP): The market value of all the goods and services a country produces within a certain time. Statistics South Africa will publish the country’s GDP numbers for the fourth quarter of 2020 on 9 March. These will be the latest GDP numbers which you find here: https://t.ly/nizW
• Depression: One-quarter of negative GDP growth.
• Recession: When the GDP contracts for two or more quarters (six months) in a row.

Just how big is the South African economy?

South Africa is one of the biggest economies in Africa, alongside Nigeria and Egypt. According to the International Monetary Fund (IMF), South Africa is nestled between Bangladesh and Finland in terms of GDP.

This means that, to some extent, we are insulated when smaller economies ‘sneeze’, but are still exposed to what happens in the world’s largest economies, such as the United States, China, Japan, Germany and France.

What is a recession? How do you go into one?

There are many reasons why economies can shrink. It can be an almost apocalyptic event such as the current pandemic but is often a matter of confidence.

When consumers are confident they will still be employed in 10 or 20 years, they are more likely to spend money on luxuries such as new clothes, dining at restaurants, travelling domestically and overseas, or making big purchases such as a new car or a house. This means there is more economic activity and the economy grows.

However, when consumers are unsure about their livelihoods, they will tighten their purse strings and save for a rainy day. Now consumers are not eating at restaurants, buying new clothes, cars and houses, which means these businesses fire workers or close down.

Did this happen during the Covid-19 pandemic?

The Covid-19 pandemic led to many countries closing their borders, fewer people travelling, companies reprioritise their spending, and imports and exports from most countries slowing down. This affected every country on the planet, leading to less economic activity and a drop in GDP for most countries.

One of the South African industries that were affected was mining and minerals – one of the key parts of our economy. Lockdown affected local mining production during and the global price of minerals dropped. This meant that local mines would have made less money, even if it was business as usual. While this is just one part of the local economy, it spilt over and affected other parts.

In what other ways do recessions play out in South Africa?

Prof. Jannie Rossouw, from the Wits Business School, pointed out in a 2017 article, South Africa needs economic activity to fight our high unemployment rate, which currently stands at 32.5 per cent.

South Africa also needs a growing economy to improve the living standards of its citizens, close the massive inequality gap and for the government to earn more money to pay social grants.

Social Development Minister Lindiwe Zulu said in a written Parliamentary reply last year that the share of South Africans receiving social grants increased from less than one in every 10 (7 per cent) citizens in the 1996/7 financial year to over three in 10 (31 per cent) South Africans in 2019/20.

When a country is in a recession, local investors might consider investing their money abroad and foreign investors will think twice about spending their money here. This leads to the local economy suffering, which, in turn, leads to South Africans having a lower demand for goods, because they are unsure what might happen in the future.

South Africa also has a large tourism industry, so if international tourists are spending less money on luxury travels to South Africa, because their own economy is suffering, then the tourism business in South Africa suffers.