SA’s economy has taken some heavy body blows: can it recover?

Economists are growing increasingly concerned about SA’s economy. This is because the country’s three major macroeconomic problems — lacklustre economic growth, growing inflation and very high unemployment — have been exacerbated by a series of major disruptions.

These include the pandemic that started as a health crisis but escalated quickly into an economic crisis too. Millions of people lost their jobs as economic activity came to a halt under lockdown.

In the middle of the pandemic, violence that lasted for eight days erupted in KwaZulu-Natal and Gauteng. Further pressure has been piled on by Russia’s invasion of Ukraine, which is pushing up food prices.

The most recent blow has been devastating floods in some parts of the country that caused loss of lives and huge destruction of infrastructure, including to Durban port, the country’s biggest.

These events hit an already fragile economy. The economy has been on the back foot since 2009. It has never returned to its levels of growth before the 2007/2008 global financial crisis. The crisis is reported to have lead to job losses of about 1-million. Moreover, economic growth declined from 2011 due a decline in demand for commodities resulting from changes in commodity prices.

The economic stagnation was further compounded by slow-paced investment. Other domestic factors that contributed to economic stagnation included restrictive macroeconomic policies and budgetary cuts.

Before the pandemic, SA had entered into a technical recession, when an economy experiences economic decline in two successive quarters. GDP growth declined by 0.6% in quarter three and −1.4% in quarter four of 2019. The trend of low growth continued, becoming worse when Covid hit.

The causal effects of the disruptions

The pandemic: SA’s economy became more depressed during the pandemic because production in most sectors came to a halt due to hard lockdowns imposed in an effort to curb the spread of the virus. In the process, various businesses shut down temporarily, and some permanently. This resulted in millions of South Africans losing their jobs.

The violence: In July 2021, businesses, shops and warehouses were destroyed, looted and in some instances burnt in KwaZulu-Natal and Gauteng. This disruption, which lasted for eight days, is reported to have cost the economy more than R50bn and almost 2-million jobs.

The floods: The recent heavy rains in Durban and parts of the Eastern Cape caused major infrastructural damage. It also brought to a halt production in some sectors and even forced some businesses to shut down. Many businesses affected were in the process of rebuilding after being destroyed during the July 2021 unrest. The closing of shops and businesses automatically translated into job losses, further exacerbating the unemployment rate.

The Ukraine war: Russia and Ukraine are both big players in global food markets in terms of production of barley, maize, sunflower oil and wheat. As a result, the war will lead to slow growth in the global economy and accelerated inflation. SA is no exception as prices of food items such as oil and grain shoot up.

In addition, there is an upsurge in the prices of commodities and fuel, which triggers inflationary pressures. This has led to the Reserve Bank increasing the repo rate on two consecutive occasions, adding an extra pinch to consumers’ woes.

The most obvious question is if there is anything that can be done. The answer is yes.

What can be done

It is evident that since the global financial crisis in 2008, SA’s economic growth has been on the decline. Growth has been on a downward trajectory with an average growth rate of just under 1.7% for the period 2008 to 2016 and below 1% for 2015/2016.

This negatively affected job creation to the extent that it translated into jobless growth. This was evident in 2019, when SA experienced a technical recession, with little growth and decreasing levels of employment. It is more pronounced among young people. There is high demand for employment but low or limited supply of employment. This is due to the fact that potential employers are limited in taking on new employees or completely closing down because of the state of the economy and the cost of doing business.

Moreover, the consumer’s purchasing power is deteriorating  due to high prices for food and electricity, as well as interest rates (cost of borrowing). This is compounded by high inflation since 2018 which averaged 5.9%.

There is a need to think of quick economic solutions to neutralise the problems of rising unemployment, rising prices and low economic growth.

First, SA needs to address the energy crisis because it is hurting already wounded businesses. Allowing independent power producers into the energy market would be a good start.

Second, there is an urgent need to accelerate the creation of labour-intensive employment (in agriculture and tourism). There is a need to revive industrial-based employment, which has been on the decline over the years. This type of employment will be more inclusive.

Third, there are many young people with entrepreneurial ideas. There is a need for proactive regulations (exemptions) that minimise barriers for SMEs entering markets largely dominated by bigger firms.

These interventions could bring about inclusive growth.

In addition, the private sector needs to get involved in funding SMEs as part of social responsibility or giving back to the community by empowering entrepreneurs.

Finally, the government needs to address the problem of rising prices. It needs to administer the prices of some staple foods as an additional intervention to the already zero-rated items. Many of these are still expensive and unaffordable to many people. This can be temporary while the government works towards long-term interventions.

* Johannes PS Sheefeni is associate professor in macroeconomics and applied econometrics at the University of the Western Cape

This article first appeared at The Conversation Africa