President Cyril Ramaphosa’s decision to emulate the lockdowns seen in Europe and East Asia will cause GDP to fall by 6-8% in Q2. It will also be the first real test of whether such policies can be implemented effectively in low income countries.
- President Cyril Ramaphosa’s decision to emulate the lockdowns seen in Europe and East Asia will cause GDP to fall by 6-8% in Q2. It will also be the first real test of whether such policies can be implemented effectively in low income countries.
- The South African government’s response to the coronavirus outbreak escalated last night, when President Ramaphosa announced that the country will go into a 21-day lockdown on 26th March. South Africans will have to remain at home, with workplaces closing unless they provide vital services (e.g. food or medicine).
- These rules will significantly reduce retail sales. Some purchases may, of course, simply be deferred. But other spending will not take place; three weeks’ worth of spending on transport services is probably equivalent to about 0.4% of annual GDP. (See Chart 1.) In total, we estimate that a three-week shutdown would cause retail sales to fall by at least 1% of GDP.
- The shutdown will also disrupt industrial sectors; South Africa’s crucial mining sector will be closed. Even if production is immediately restarted, we estimate that a three-week shutdown would cut GDP by 1.7% in Q2. This will cut global supply of platinum and palladium, but weak demand will keep prices low.
- The economic effect of the lockdown will depend, however, both on whether it is extended and whether such policies can be imposed in low income societies effectively. While some large employers have pledged to continue paying housebound staff, a quarter of employed South Africans work in the informal sector or as household help. Few have savings to fund a period of enforced idleness; in recent years households have been net borrowers. (See Chart 3.) Public aid announced so far amounts to just US$28 per month per person. Further support may be necessary, which would add to crippling fiscal problems.
- For now, we’ve cut our 2020 forecast from -2.5% to -4.0%, which would be the worst result in South Africa’s recent history. Output would, however, bounce back rapidly in 2021. (See Chart 4.)
Chart 1: Three Weeks’ Worth of Spending
Chart 2: Mining Sector Contribution to GDP (%-pts)
Chart 3: Household Savings (% of Disposable Income)
Chart 4: GDP Forecast (% y/y)
Sources: Stats SA, SARB, Refinitiv, Capital Economics
John Ashbourne, Senior Emerging Markets Economist, firstname.lastname@example.org