OECD expects SA’s economy to shrink 11.5% in 2020

The revision leaves the country with the worst expected growth outcomes out of the countries included in update

The Organisation for Economic Co-operation and Development (OECD) has revised down its expectations for SA’s economy, leaving it among the countries hardest hit by the economic fallout of the coronavirus pandemic.

The Paris-based body, whose members and partner countries represent the bulk of global trade and investment, now expects SA’s economy to shrink 11.5% in 2020, in its interim economic outlook released on Wednesday.

The revision is down from its June estimate for a contraction of 7.5%, and also worse than an 8.2% decline forecast under a more severe, “double hit” scenario, which modelled further outbreaks of the pandemic later in 2020.

The revision leaves SA with the worst expected growth outcomes for 2020, out of the countries included in the update, followed by Argentina, Italy, Mexico and India.

The updated forecast comes as SA President Cyril Ramaphosa to address the nation at 7pm on Wednesday on whether the country can move to a level 1 lockdown, which could include the lifting of international travel bans and the end to the curfew.

More details on a comprehensive economic recovery package are also awaited, with the presidency announcing on Tuesday that social partners at the National Economic Development and Labour Council (Nedlac) had agreed on a recovery plan, which is to be considered and finalised by cabinet.

Last week, the grim GDP data released by Stats SA showed that SA’s economy shrank 51% on an annualised basis during the second quarter, or contracted 16.4% if the figures are not annualised.

This has hastened the calls for much-needed reform to help reignite growth that was already weak before the pandemic shock.

In June the OECD urged SA to tackle “structural bottlenecks,” in particular problems at power utility Eskom. Intermittent power cuts by the embattled utility have persisted through the lockdown, despite a drop off in economic activity, and it is expected to continue to weigh on SA’s recovery efforts.

The presidency said that Nedlac has “agreed on a social compact which commits government, business, labour and community to mobilising funding to address Eskom’s financial crisis in a sustainable manner — in return for an efficient, productive and fit-for-purpose Eskom that generates electricity at affordable prices.”

The OECD also revised down SA’s forecast for 2021 to 1.4%.

The bleaker picture for SA comes as global GDP is projected to decline by 4.5% in 2020, before picking up by 5% in 2021.

Though the drop in global growth is smaller than was expected in June, it is “still unprecedented in recent history” and masks the “considerable differences across countries”, including the weaker-than-expected outcomes in India, Mexico and SA.

Though global output recovered after the lifting of restrictions and reopening of businesses, the pace of global recovery has “lost momentum” in recent months, said the body.

The OECD stressed that its outlook “is subject to considerable uncertainty” and that its projections are “dependent on assumptions about the spread of the Covid-19 virus and policy developments”.

“The projections assume that sporadic local outbreaks will continue, with these being addressed by targeted local interventions rather than national lockdowns,” it said.

“However, a stronger resurgence of the virus, or more stringent containment measures, could cut two to three percentage points from global growth in 2021, with higher unemployment and a prolonged period of weak investment.”

The OECD said that fiscal, monetary and structural policy support implemented by many countries in response to the crisis, needs “to be maintained to preserve confidence and limit uncertainty, but evolve with underlying economic conditions”.

Large emerging-market economies with a credible macroeconomic policy framework, can continue to provide support through a combination of monetary and fiscal policy easing.

But it stressed that in some large emerging markets such as SA, high public debt and contingent liabilities, or a low tax base, “constrain the further use of fiscal policy”, which has shifted the burden of economic stabilisation to monetary policy.

In SA,’ s along R500bn with economic the government support package, the SA Reserve Bank has slashed interest rates to record lows and implemented various regulatory relief measures for banks, in an attempt to stimulate lending through the crisis. —