Government's lack of a recovery plan is a 'grave risk' - May 2020

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Marie Antelme

Marie Antelme

Marie joined Coronation in 2014 as an economist in the Fixed Interest investment unit. She has 21 years' experience as a market economist.

Like many countries around the world, South Africa is discovering that it is infinitely more difficult to come out of lockdown than it was to go into it. There is a huge amount of uncertainty about how and when the economy will open up again, and what is necessary for restrictions to be eased.

This means that it is also increasingly difficult for economists to make projections. The novelty of the virus and the fact that the response from governments is unprecedented, make modelling outcomes extremely challenging.

‘There is much we don’t know, which makes it difficult to see the way forward. We don’t know what the depth of economic deterioration will be,’ said Marie Antelme economist at Coronation Fund Managers. ‘In particular the duration of the lockdown will have a meaningful and potentially exponential impact on the economy. We also don’t know if further outbreaks will occur. These are critical aspects in assessing the future.’

Behavioural change

What is becoming more certain is that a V-shaped recovery is increasingly unlikely.

‘What we do know is that it’s not going to be a bounce back,’ said Antelme. ‘The risk adjusted re-opining is now seems likely to be prolonged, and it will be behaviour-changing. This will have an impact on both social behaviour and economic outcomes.’

Not all of these changes will necessarily be unproductive. There will be a reallocation of resources, and some sectors will benefit. For instance, the greater use of online conferencing is both more efficient for users and positive for providers.

‘But the adjustment process takes time and there will be an economic cost – across sectors and in time lost,’ said Antelme. ‘So, while it may not be growth-negative in the long term, it will still take us a long time to reach the level of GDP we were at last year.’

Antelme is forecasting a contraction in South Africa’s GDP of 9.8% this year. By the end of 2022, she is expecting that the country’s GDP will still only be 95% of what it was at the end of 2019.

Fraying at the edges

Much, however, depends on how South Africa negotiates its path out of lockdown and into an economic recovery.

‘I think the lockdown initially was well communicated, and everyone clearly understood that the purpose of the lockdown was in-line with global best thinking at the time,’ said Antelme. ‘The intention was to flatten the curve, but that doesn’t necessarily get rid of the curve. It allows you time to create awareness and prepare the healthcare system and supporting emergency response services.’

There has, unfortunately, been a fraying of this clear rationale and intentions.

‘It is becoming apparent that the very hard stop is exacting a massive cost on an economy that was already very vulnerable,’ said Antelme. ‘And I think that the absence of a detailed, well-communicated normalisation plan, that includes a clear intent to deliver a recovery programme, poses a grave risk.

‘Compounding this is a loss of faith,’ she said. ‘People have lost confidence because of the contradictions in government’s post-lockdown communication, and a loss of momentum in the quality and extent of public leadership. The decline in public support is a setback to a process that was always going to be difficult.’

Inter-related

It is imperative that the country presents a credible growth strategy that runs in parallel with a reasonable and sensible plan for re-opening the economy, with urgency.

‘We shut down to prepare, so have we prepared or not?’ said Antelme. ‘We need to know as best we can what the status quo is in terms of testing, tracing and healthcare provisions, and then that there is the will to drive an economic recovery plan.’

What the government needs to do in terms of supporting economic growth is already laid out in the economic strategy paper prepared by National Treasury last year. The plan is therefore already available.

‘It has a clear focus on key sectors of the economy,’ said Antelme. ‘They were critical before, and they are even more critical now. We need to know that the minsters who have been tasked with those reforms are delivering in an accelerated fashion, and the communication around that needs to be unambiguous.’

This would be something like a best-case scenario, however Antelme doesn’t see this as the most likely outcome.

‘I think we are going to muddle through,’ she said. ‘We will have an uneven move to something less draconian in terms of lockdown, and the way in which we deal with the current crisis and a possible second wave of infection will not be smooth. This will raise the economic cost.’

The recovery will therefore be prolonged, and patchy.

Positive steps

Antelme does, however, note two potential positives.

‘We could be surprised by the degree to which fiscal and monetary programmes support economic activity,’ she said. ‘It’s hard to model, but I think there has been an exceptional effort to protect vital sectors of the economy, protect jobs and soften the blow to the millions of affected South Africans. I think society as a whole is trying extremely hard to protect the vulnerable to ensure there isn’t a permanent loss of jobs, loss of capacity and loss of life.’

Secondly, even if reform doesn’t happen as swiftly and as evenly as one might hope, the crisis has nevertheless created a new sense of common purpose.

‘One thing to highlight is that the engagement with the private sector has been a huge change to what we have seen in the past 10 years,’ said Antelme. ‘There has also been support from the unions, for instance, in their improved awareness that we may need to approach international finance institutions for assistance. That is a step forward.’

There is therefore a genuine inclination to come through this with a new social compact.

‘I think there will be a greater willingness to engage and protect the economy going forward,’ said Antelme. ‘We mustn’t waste that opportunity. We must embrace it.’

First published on Citywire.co.za on 18 May 2020.