A crash of any size should be a wake-up call

One bank economist recently revised his forecast for the economy this year downwards from -8% to -9%. Another did the reverse. This week’s load-shedding prompted a third to take her forecast down to -10%. And the grisly second-quarter GDP figures due out on Tuesday will no doubt prompt yet another round of revisions. Does the exact magnitude matter? Any of these outcomes is truly terrible, especially for an economy that was shrinking even before the Covid crisis. And while there’s a big difference between, say, 1% and 2%, the further away from zero you get the less of a difference it seems to make. We’ve never seen a contraction anything like this steep; we don’t know yet what -7% or -10% looks like in terms of damage to SA’s social and economic fabric, except that it’s likely to be extreme.

So why does anyone worry about the precise number?

The South African Reserve Bank’s monetary policymakers worry about it in deciding interest rates. They look at the so-called output gap — how fast (or slowly) the economy is growing relative to its potential growth. The further it falls short of potential, the less pressure there will be on inflation and the more scope there might be for rate cuts.

The Treasury’s fiscal policymakers worry about it too. The

Treasury’s forecast, like the Bank’s, is in the -7% range. A worse outcome could see revenue miss February’s budget target by even more than the massive R304bn the Treasury projected in June. As it is, figures for the first four months of the fiscal year already show the tax take is

21% below the same period last year, which suggests the shortfall could indeed be larger — though at this stage it’s such telephone numbers that another R20bn might not make that much difference. And given the extent to which the government seems to be underspending, a larger shortfall may not mean a higher deficit. Even so, the further the economy falls, the harder it will be to fix the fiscal mess.

Worse growth obviously also means worse jobs and income worries.

Again, it’s not clear how much worse, but SA will be much the poorer and more fragile either way.

A fourth reason the scale of the economic crash matters lies in how badly the number hits sentiment, in an economy in which confidence is already at record lows. The danger is that spectacularly bad historical numbers further undermine confidence and so make the future more likely to be bad too. Which brings us to this week’s data announcement.

The economy could have shrunk as much as 55%-60% during the second quarter on an annualised basis, the more bearish economists predict, with the consensus forecast being a 40%-45% contraction. That should make for horror headlines — especially if comparisons are drawn with countries such as India, which, with a reported contraction of 24% in the second quarter, is one of the world’s worst so far.

But SA has a bad habit of making its headline quarterly numbers look far worse by annualising them — in other words, the number doesn’t just reflect how badly the economy tanked in the second quarter but assumes it stays on that trajectory for the entire year. SA is one of very few countries to do this — if India’s numbers were headlined the same way, its second-quarter decline would be more than 60%.

With the lockdown now loosened, the lower GDP went in the second quarter the higher it could bounce in the third quarter, posting pluses of 40% or more even if the recovery is not that robust. But the economy has to pick up very sharply in the third and fourth quarters to bring the full year towards the better end of economists’ deeply negative forecasts. And the uptick has to be sustained if businesses and households are to regain their confidence and start spending again.

That’s not going to happen without some unequivocal signs of fiscal and economic reform. Which is another reason the magnitude of the minus figure might matter. Perhaps policymakers will get the point.

A fourth reason lies in how badly the number hits sentiment