South Africa’s economy has taken a beating: can it recover?

Economists are increasingly concerned about the South African economy. Indeed, the country’s three major macroeconomic problems – sluggish economic growth, rising inflation and very high unemployment – have been exacerbated by a series of major disruptions.

These include the COVID pandemic which started as a health crisis but quickly turned into an economic crisis. Millions of people have lost their jobs as economic activity has come to a halt due to the lockdown.

Amid the pandemic, violence that lasted eight days erupted in Kwa-Zulu Natal and Gauteng. Further pressure has come from Russia’s invasion of Ukraine, which is driving up food prices.

The most recent blow was devastating floods in parts of the country that caused loss of life and massive destruction of infrastructure, including at the country’s largest port in Durban.

These events hit an already fragile economy. The South African economy has been lagging since 2009. Since then, it has never recovered to the initial levels of economic growth before the global downturn of 2007/2008 (financial crisis). The crisis is said to have resulted in job losses of around 1 million. In addition, economic growth experienced a decline from 2011 due to a decline in demand for raw materials resulting from the evolution of raw material prices.

Continued economic stagnation has been further aggravated by slow investment. Other domestic factors that have contributed to economic stagnation include restrictive macroeconomic policies and budget cuts.

Prior to the pandemic, South Africa had entered a technical recession – when an economy experiences an economic decline over two successive quarters. Gross domestic product growth declined by 0.6% in the third quarter and -1.4% in the fourth quarter of 2019. The low growth trend continued, worsening when COVID-19 hit .

The causal effects of disturbances

The pandemic: The South African economy has become more depressed during the pandemic because production in most sectors has come to a halt due to strict shutdowns imposed in a bid to curb the spread of the virus. In the process, various businesses temporarily closed, with others closing permanently. This resulted in job losses for millions of South Africans.

Violence : In July 2021, businesses, shops and warehouses were destroyed, looted and in some cases burned down in KwaZulu-Natal and parts of Gauteng. The disruption, which lasted eight days, would have cost the economy more than 50 billion rand and almost 2 million jobs.

Flooding : Recent heavy rains in Durban and parts of the Eastern Cape have caused extensive damage to infrastructure. It has also caused production to stop in some sectors and even forced some companies to close. Many affected businesses were being rebuilt after being destroyed during the July 2021 unrest. The closure of shops and businesses automatically translated into job losses, further worsening the unemployment rate.

The Ukrainian War: Russia and Ukraine are two important players in world food markets in terms of production of barley, corn, sunflower oil and wheat. As a result, the war will lead to a slowdown in the growth of the world economy and an acceleration in inflation. South Africa is no exception as the prices of food items such as oil and grain are skyrocketing.

Additionally, there is a spike in commodity and fuel prices which triggers inflationary pressures. This led the South Africa Reserve Bank to raise the repo rate twice in a row, adding a further pinch to consumer woes.

The most obvious question that follows is, is there anything that can be done? The answer is yes.

What can be done

It is evident that since the global financial crises of 2008, South Africa’s economic growth has been in decline. Specifically, growth followed a downward trajectory with an average growth rate of just under 1.7% for the period 2008 to 2016 and further worsened below 1% for the period 2015 to 2016.

This downward trend in economic growth has had a negative effect on job creation as it has translated into jobless growth. This was evident in 2019, when South Africa experienced a technical recession, with weak growth and declining employment levels. It is more pronounced in young people. As such, there is a high demand for employment but a low or limited supply of employment. This is because potential employers are restricted from hiring new employees or shutting down completely due to the state of the economy and specifically the cost of doing business.

Moreover, the purchasing power of the consumer is deteriorating day by day due to the high prices of food, electricity, interest rates (cost of borrowing) and many more. This situation is aggravated by high inflation since 2018, which averaged 5.9%. This is the current rate of inflation in South Africa.

It is therefore necessary to think about quick economic solutions to neutralize the problems of rising unemployment, rising prices and weak economic growth.

First, South Africa has to deal with the energy crisis as it hurts already hurt businesses. Allowing an independent power producer to enter the energy market would be a good start.

Second, there is an urgent need to accelerate the creation of labour-intensive jobs (in agriculture and tourism). More so, it is necessary to revive industrial employment which has been declining over the years. This type of employment will be more inclusive.

Third, there are many young people with entrepreneurial ideas. Therefore, there is a need for proactive regulations (exemptions) that minimize barriers to entry for small and medium enterprises in markets largely dominated by large corporations.

These interventions could promote inclusive growth.

In addition, the private sector should get involved in financing small and medium enterprises as part of social responsibility or giving back to the community by strengthening the entrepreneurial culture.

Finally, the government must tackle the problem of rising prices. It must administer the prices of certain staple foods as an additional intervention for already zero-rated items. Many of them are still expensive and unaffordable for many people. Price administration can be temporary while moving towards long-term interventions.

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