Covid-19 severely impacts business confidence, unemployment

17th August 2020 By: Donna Slater - Features Deputy Editor and Chief Photographer

Strategy and investment consulting firm Singular Group says the Covid-19 pandemic has severely impacted South Africa’s economy, to such an extent that business confidence is at an all-time low, 22% lower than during the 2008 global financial crisis and currently ranking in the 8% range.

During the first quarter of this year, unemployment was already the highest it has been in a decade at about 30%, and has rocketed to near 40% when the Covid-19 lockdown was enforced in the country, according to the firm.

Singular Group co-founder and partner Lorenzo Tencati says unemployment will remain stubbornly high, at greater than 35% until at least the end of 2024. “We have been saying from the first week of lockdown, that [the Covid-19-induced recession] was going to be, and still is going to be, the biggest economic shock since the end of World War 2.”

These factors are compounded with South Africa experiencing a significant decline in exports, with a 2.3% contraction compared with the fourth quarter of 2019. During the same time, imports declined by 16.7% and gross fixed capital formation declined by 20.5%.

In terms of what citizens are feeling, he says it is very clear that the average person fears the economic impact post-Covid-19 more than contracting the virus. “This means the economic fear is bigger than the healthcare fear,” he states.

In order of fear levels, South Africans responded to a fear index compiled by Ask Africa at the end of July, with 26% fearing the prospect of unemployment and 23% fearing contracting Covid-19.

Further, 16% feared food shortages as a result of the virus, while 15% feared a loss of income. Another 12% feared noncompliance with lockdown rules, while 6% feared children going to school without protective clothing.

Only 4% feared an economic crash or recession.

Meanwhile, on the upside, Tencati says, as humankind, people are getting better at managing recessions.

“Looking at the extent of the stimuli already injected into the system by large central banks from the US and Europe, as well as South Africa, which has moved quite aggressively from a monetary policy perspective . . . the extent to the stimuli is between two and five times bigger than the extent of the stimuli that were injected into the economy during the 2008/9 [financial] crisis,” he says.

The results of this are already showing and will continue to show in the global financial market.

However, he points out that this will have secondary consequences and, therefore, it is to be expected that these unprecedented and very aggressive moves from central banks will come with unintended consequences.

“But certainly, it is helping to stimulate the economy in the short term. This is evidenced through the fast recovery that we are seeing – the rebound for some countries coming out of strict lockdowns has been swift, such as that of China.”

China’s gross domestic product (GDP) grew by 11.5% during the second quarter, while South Africa’s GDP for the second quarter is forecast to contract by between 15% and 20%.

In this regard, Tencati lays out three scenarios, from worst to best, for South Africa’s economy and GDP, the best case being that the country's GDP declines by only 8% this year, compared with 2019.

As a base case scenario, he suggests that South Africa’s GDP will contract by 10% this year. In the worst case scenario, Tencati says South Africa’s GDP will decline 13%.

However, he suggests gradual growth above 1.2% GDP growth will take place in the beginning of 2021 and maintain a low but steady upward trajectory to about 1.4% in 2026.

Post-Covid-19 he also says five major risks will be present in the domestic economy, including rising debt servicing costs, global financial market volatility, load-shedding, escalation of trade barriers and State-owned entity bankruptcy.