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Reflecting on the economy’s 7% contraction

Not least of all because the GDP index produces data that can inform a quick policy response by government.
In China, which our leadership so admires, this kind of GDP figure would have jolted the government into quick action, says the author. Image: Shutterstock

Last Tuesday (March 9) Statistics SA released the country’s gross domestic product (GDP) results for the fourth quarter of 2020. The standout figure was the 7% decline in GDP in 2020, obviously exacerbated by the pandemic. Still, the number will have a significant bearing on how 2021 pans out economically over the next three to five years.

Read: SA virus-hit economy shrank most in 100 years in 2020

The GDP remains the index of a country’s economy, a tally as it were, of several things that are compressed into economic output. If GDP grows it bodes well for a country and its citizens, at least that is what economists say. The social scientist in me disagrees, but I will expound on my misgivings about using GDP as measure of prosperity at a later time.

For now, my attention is on the drastic fall in our GDP figure (to be honest it was expected, so it did not come as a surprise). It is a serious concern, perhaps the most serious concern of contemporary South Africa that produced a decline in output when the pandemic deepened, which became a long drawn-out matter.

In light of the 7% decline, it should be clear that the impact on South Africa became progressively more negative as the shocks accumulated.

The aftershocks are reverberating

This amplified the weakness in the economy in three ways.

First, the preventative measures taken by government to limit the spread of the virus, such as the lockdown restricting the movement of people. This had a direct impact on employment and the demand for labour, with production reduced to zero in some sectors due to inactivity.

Moreover, the economic inactivity caused the hollowing out of the key industries. For example, mining production fell by 6.2% year on year in January, with platinum group metals (PGMs) being the biggest negative contributor – falling by 14.5% compared with the same time last year. Mind you, PGMs are currently the biggest employer and employment creator in the mining sector.

Second, trade costs increased because the price unit of imports and exports increased. The spillover effect is wiping out any competitiveness South Africa had on production because of the higher costs. Further, with the travel ban, inbound international tourism decreased drastically, adding to the woes of the falling GDP.

Third, the underutilisation of labour due to lockdown – where factories and some companies closed and workers stayed at home – had a contagion effect on employment because when economic activity resumed, not all business opened or all workers returned.

Grim reality

While it is still difficult to estimate the full impact of Covid-19 on the economy, the GDP contraction paints a grim picture: 7% is a big number for an economy that has been under pressure, has had recessions, and cannot break its free-fall.

Inescapably, the more profound effects will be on job retention and creation, government spending and its debt management, attracting investment and service delivery in the long term.

Tellingly, as a national indicator of South Africa’s economic health, a 7% decline is a genuine problem we need to learn to address.

Unfortunately, South Africa’s biggest problem or rather stumbling block to recovery is the kind of political leadership it has.

We have a ruling elite whose members continue to allow Marxist ideologies to inform their worldview. But these ideologies make for a poor tool in understanding how things actually work – and change – in the world economy.

Blinkers

The Marxist view is not enough because it looks at what it can see, whereas the dialectic, the art of investigating or discussing the truth of opinions, associated with being a leader in government, means being able to look at the economic system as whole – including the constraints that may bind it and unforeseen challenges that may arise, such as the pandemic.

Read: The ANC looks like a schizophrenic alchemist

One gets the sense that, administration after administration, those at the helm of government simply do not understand the actual scope and the scale of the effects of a falling GDP – and why it matters. For example, we know that using the GDP index enables economists and statisticians to track what is happening in the economy, and to produce data that can inform a quick policy response.

However, the kindergarten level of economic discourse our politicians have is such that they don’t understand that economic recovery takes time and so does growth.

What the president and his leadership team can do is create an environment where growth takes place by developing and deploying practical solutions to stimulate growth.

For example, removing barriers that hinder increasing productivity (say by adopting technology that might replace workers) through innovation and trade. In the short term the two will reduce the number of workers required to produce the goods we need, but they will in the long run stabilise existing jobs and lead possibly to the creation of new jobs.

Paralysis snap-out needed

Right now, South Africa need pragmatic realism on stimulating the economy instead of the entrenched blinkered ideology.

I’m afraid our leaders have become used to a negative growth trend, to the point that it is  shrugged off.

Ironically, in China (which they so admire) a 7% GDP contraction would have prompted the government into quick action with short-, medium- and long-term plans to stimulate the economy.

If GDP (its shortcomings considered) is the sum of a country’s economic activity – that is the production of goods and services – then what do the latest figures tell us about where the country is headed?

Listen to Nompu Siziba’s interview with Citadel chief economist Maarten Ackerman (or read the transcript here) on the latest GDP numbers:

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Come now, you really believe in the 7% the government mentioned? It should be 77%
Let me make it simple for you. South Africa is broken. Look at the amount of closed for ever businesses(those who actually pay tax). Look at the amount of people begging everywhere now, look at the amount of rubbish in the roads/streets. And then look at the corruption over the last 12years…..be honest with yourself

Fully concur !! The bulk of small companies that went to the wall are those that employ 5 to 20 people — labour intensive.

Come now, you really believe in the 7% the government mentioned? It should be 77%
Let me make it simple for you. South Africa is broken. Look at the amount of closed for ever businesses(those who actually pay tax). Look at the amount of people begging everywhere now, look at the amount of rubbish in the roads/streets. And then look at the corruption over the last 12years…..be honest with yourself

The Americans just got their SECOND stimulous package for households earning less than $ 150000 per household- roughly $ 1700 for every member, including children. That is apart from the help for businesses. Here they killed small businesses, killed even the informal sector and stole and are still stealing all money available. And hamper the vaccine rollout through state centralisation, while in America you go to your local large pharmacy group for your shot.

It is a long list Griet and the ANC regime parasites have opted at almost every choice to take that of ideology, pride, greed, self interest and just plain meanness to destroy the SA economy. It has taken 20 odd years but the chicken is now roasting; ask Tito.

All Tito cares about is eating that nicely roasted chicken. With a glass or two of French Burgundy.

The ANC should be sued for not taking appropriate measures when needed allowing a country and its citizens to run onto the rocks.

If SA was a ship, the captain of he ship would have been trialed for failing to do what was required to prevent the ship from running onto the rocks. Ironically the captain blames the rocks, storms, strong winds and even his hard working crew.

So n bek moet jam kry …. “Eskom is broken. SAA is dead. The SOEs are not working. If you’ve got any money, you’ve got your own Borehole, your own security plan, your own electricity, you’re paying for your own private schooling. Unemployment is heading to 50” Rob Hersov

“However, the kindergarten level of economic discourse our politicians have is such that they don’t understand that economic recovery takes time and so does growth.”

Precisely! And how do we get the voters to get rid of them? And who will take their place? If not, the spectre of Zimbabwe looms ever closer.

Least of our worries now. What reflecting on the economy and kinds of rubbish talk. Open your eyes people, the militants are on our door step. Soon they will be here in our towns and cities. And the politician are still mucking about, propaganda and what have you

End of comments.

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