In marking the tenth anniversary of the largest financial crisis since the Great Depression, the Bureau for Economic Research (BER) has looked back at the performance of the South African economy between 2010 and 2017.
Since the financial crisis, domestic real gross domestic product (GDP) growth has underperformed relative to both emerging market peers and average global growth.
Since 2014, domestic growth has also come in lower than the average for advanced economies, the BER says in a research note released on Wednesday.
The reasons for the malaise have been well documented, with the lacklustre performance of the South African economy post-crisis ascribed to both external and internal factors.
BER economist and research note author Harri Kemp notes that domestic factors rather than external factors explain the lion’s share of the underperformance.
“These include falling confidence, widespread policy uncertainty, mismanagement of State resources and various other structural constraints, which conspired to weigh on domestic economic activity.”
He adds that domestic growth tracked the global average quite closely prior to the crisis, but began diverging in 2010.
The research note attempts to quantify the cost of these “lost years” in terms of the size of the economy, employment growth and government revenue. Based on relatively simple assumptions, it is determined that domestic real GDP growth could have been between 10% and 30% higher by 2017.
Under the assumption that the domestic growth trajectory matched that of South Africa’s emerging market peers, real GDP growth would have been 29.3% (or R915-billion) higher.
“Under the more realistic assumption that we tracked average global growth post-crisis, the domestic economy would have been 15.4%, or R481-billion, larger in 2017,” says Kemp.
Kemp notes that the impact of the post-crisis malaise can also be assessed in terms of foregone employment opportunities associated with below-par domestic GDP growth.
After declining in the decade before the financial crisis, the domestic unemployment rate has ticked up steadily between 2010 and 2017 as domestic economic activity was insufficient to absorb new entrants into the labour market.
The BER research shows that, under different assumptions regarding post-crisis growth and the elasticity of employment, the economy could have created between 500 000 and 2.5-million more job opportunities over the eight-year period.
“This means that the unemployment rate could have been 5 to 15 percentage points lower than the 27.5% recorded in 2017,” notes Kemp.
Another direct consequence of the weak post-crisis performance of the South African economy can be seen in the deterioration of government accounts. Persistent tax revenue shortfalls over this period, partially linked to the underperformance of the economy, contributed to the deterioration in the fiscal situation.
“Under a different post-crisis growth trajectory, one closer to that of our peers, and a sustained improvement in collection efficiency, total tax receipts over the eight-year period would probably have been higher by between R500-billion and R1-trillion,” explains Kemp.
Unfortunately, the outlook for economic growth does not bode well for a strong recovery.
The latest BER forecast pegs growth in real GDP at just 0.6% for 2018 and 1.5% in 2019.
”Based on BER’s current forecasts, the 2010s look set to be the worst growth decade in South Africa’s post-World War II history,” avers Kemp.
For the period 2020 to 2023, growth is expected to average just 2.4% – significantly below the long-run average of 3.5%.
The results presented in the latest BER research note are based on a range of relatively simple assumptions, it states.
The underperformance of the economy in the post-crisis period was driven by a wide range of complex factors. “That being said, we argue that these relatively simple ‘back-of-the-envelope’ calculations do provide some insight into the order of magnitude of the cost of the stagnation in the South African economy between 2010 and 2017,” states Kemp.
He adds that it will take several years to undo the damage done over the post-crisis period through domestic policy missteps and the mismanagement of public resources.
The new administration under President Cyril Ramaphosa needs to urgently reignite confidence through clear and well-articulated policy to boost private investment and consumer spending.
“Only then can South Africa start along the path to recovery.”