With right policies, at least the pain will not be self-inflicted
SA’s post Covid-19 economic recovery will depend on several factors, many of which are within the policymakers’ control and others aren’t.
As an economy in which about 60% of the expenditure side is accounted for by household consumption. consumer confidence will be critical for the recovery of economic growth.
However, this time consumer confidence is likely to remain depressed, driven by factors policymakers cannot directly control. This implies that economic growth will not recover quickly even if the economy is opened up quickly.
The recovery will depend on two critical factors, one of which can be influenced by economic policymakers, while the other is independent of economic policy.
The first is job security and employment prospects once the crisis is over. In the current environment, with thousands of companies expected to close shop, job security is possibly at its lowest since the dawn of democracy. The loss of jobs, forecast to be a minimum of 1.7-million, and associated income loss, will push consumer confidence lower.
Job insecurity implies that even consumers who still have spending ability will not spend. Discretionary savings are likely to increase and remain elevated as long as the economic recovery has not improved job prospects.
Historically, consumer confidence has led business confidence. This means low consumer confidence will be followed by a fall in business confidence as reduced spending will result in poor profitability for consumer-facing corporates, especially for nonessential goods and services.
A decline in business confidence will in turn lead to a delay in fixed investment and therefore job creation.
The downward spiral from low consumer confidence to low business confidence can be short-circuited by sound economic policy, which will encourage spending on critical infrastructure, the funding of which can be done through the fiscus and private sector, including institutional investors.
The second factor that will be crucial for economic growth, even after job security and prospects have improved, is how long the underlying Covid19 health crisis takes to resolve. In Italy, where mass burials have become common, people stay indoors not because the government forces them to but out of fear. With the projections of infections in SA — fatalities are expected to reach 48,000 by November in a worst-case scenario presented by the health minister — fear is likely to sweep across the country.
Even after the health crisis is resolved it is plausible to expect that consumers will not immediately feel safe. I love wine and the majestic views Cape Town offers, for instance, but I will not be taking a flight there for some time no matter how many protective masks I may have. I guess a lot of people will feel the same.
Unfortunately, the fear factor is independent of economic policy. More so since not even the best health experts know when a vaccine will be ready.
To make matters worse, the opening of economies will increase the risk that infections will rise rapidly again, even in regions that have seen a slowdown in new cases. What this means is that policymakers must do everything in their power to make the right policies so that if external factors do impede on the economic recovery it will not be a repeat of the last decade, when it was self-inflicted, but truly something uncontrollable.
Failure to do that will bring about economic and political instability for years to come.