Unchecked coronavirus could halve global growth, OECD warns
The pace of global growth could halve if the spread of the coronavirus is not contained, the Organisation for Economic Co-operation and Development (OECD) warned on Monday.
While countries such as China, the epicentre of the outbreak, are ramping up efforts to stimulate their economies to ameliorate the effects of the virus, SA has no fiscal room to buffer against the economic fallout from the disease, experts are warning.
Economic growth data — due out from Stats SA on Tuesday — is expected to be poor, as SA has battled power cuts, policy uncertainty and poor business and consumer confidence levels.
The OECD said on Monday global growth will slow, even on the assumption that the epidemic peaks in China during the first quarter of 2020 and outbreaks in other countries are contained. Under this scenario, it sees growth falling to 2.4% in 2020 from an “already weak” 2.9% in 2019.
But in a scenario where the virus spreads widely throughout Asia, the Pacific region, Europe and North America, the OECD expects growth to drop to 1.5% in 2020 — half the rate expected before the virus’s outbreak.
The OECD cut growth prospects for China — SA’s largest trading partner and an important export market for locally produced commodities — expecting its growth to slip below 5% in 2020. It is expected to recover to more than 6% in 2021, however, as output eventually returns to levels projected before the outbreak.
The OECD also slashed its expectations for SA’s growth to 0.6% for 2020, down from its previous forecast of 1.2%, with growth in 2021 cut to 1% from 1.3%.
With the outlook for the world economy now dimming, the SA Treasury’s forecasts for growth, released in last week’s national budget, are at risk.
The Treasury cut its expectations for growth to 0.9% for 2020 and 1.3% in 2021. Though the Treasury did not flag the coronavirus, it warned that if economic reforms to boost growth were not implemented, and global growth worsened, SA’s economy could contract during the first half of 2020.
Even before the spread of the coronavirus began to be felt across world markets, SA did not have the fiscal room to cope, said Lullu Krugel, chief economist at PwC.
Ratings agencies such as Moody’s Investors Service have previously warned of the potential risks to SA from global events, she said.
“If the global economy turns, that is where we get into really big trouble, because we don’t have the fiscal bandwidth to stimulate the economy,” Krugel said.
The state’s debt levels are expected to rise in the coming years, reaching 71.6% of GDP in 2022/2023, despite efforts to rein in government spending, including R160bn in savings on public servants’ salaries. The budget deficit, meanwhile, is set to widen to 6.8% of GDP in 2020/2021.
In a recent report, PwC warned of the effect the virus and a slowdown in China could have for SA businesses. Adverse effects include hits to SA’s export revenues and disruptions of import-dependent manufacturing and retail supply chains. The report warned that whether a company is dependent on trade or not, SA’s businesses “need to consider a 0.2 percentage point cut in growth prospects for 2020 in their scenario planning”.
But Krugel told Business Day the report was focused primarily on the implications of a major slowdown in China. Now, as the disease has moved to areas in Europe — another important trade partner to SA — “we are probably underestimating what is happening there”.