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Covid-19 ... the economy killer

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The streets in Sandton remained free of traffic on the first day of the 21-day lockdown. The thriving business hub accommodates some of world’s top companies and the JSE. Picture: Rosetta Msimango
The streets in Sandton remained free of traffic on the first day of the 21-day lockdown. The thriving business hub accommodates some of world’s top companies and the JSE. Picture: Rosetta Msimango

A sharp economic contraction of 1.2% worldwide, and an accompanying 2% contraction for South Africa, are expected as a result of the Covid-19 coronavirus.

However, economists are of the opinion that the situation could turn around quickly – if the virus is contained within the next few months.

There is major concern about the effects of the pandemic.

The 21-day lockdown threatens the existence of small businesses, and will have serious consequences for mines and certain manufacturers.

It is feared that up to 1 million people could lose their jobs.

The Edcon Group, the country’s second-biggest clothing retailer, appears to be one of the first major victims.

Edcon Holdings, which owns the Edgars and Jet chains, has been under pressure for some time and recently announced a turnaround strategy.

The 21-day lockdown threatens the existence of small businesses, and will have serious consequences for mines and certain manufacturers

Edcon CEO Grant Pattison told Bloomberg on Friday that most of the retailer’s 1 110 clothing stores are expected to close down.

The group’s comparative sales fell by 45% since President Cyril Ramaphosa declared a national state of disaster two weeks ago. Income for this month is projected to be R400 million less than expected.

This, coupled with an expected decline in debt collection, means the group will have just enough money to pay salaries.

“Edcon will be unable to pay any other accounts at this time,” Pattison said.

The company, which employs 18 000 people, said it would consult with government about the possibility of financial assistance.

“What we are experiencing at Edcon is an early indication of the challenges that the restrictions will bring for government and various other businesses,” added Pattison.

Hugo Pienaar, chief economist of the Bureau for Economic Research, tweeted this week that South Africa produces about R9 billion in real GDP a day. At a rough estimate, this means a lockdown that lasts for 21 days would lead to a loss of R189 billion.

Deduct this from last year’s real GDP, and that would mean an economic contraction of 6% this year.

Pienaar does, however, emphasise that everything is not coming to a complete standstill, given that certain activities will continue and that weekends should also be taken into account.

Read: How should companies ‘be good’ in the time of Covid-19? 

Johann Els, chief economist at Old Mutual Investment Group, said emerging markets would not be the only ones to suffer. For the US, an economic contraction of 1.8% is predicted (as opposed to a growth of 2.3% last year).

And, in the case of the Eurozone, a contraction of 2.5% is on the cards, compared with last year’s 2.9% growth.

Although China expects very poor figures for the first and second quarters, the Chinese economy is expected to grow by 1.2% this year (compared with 6.1% last year).

Kristalina Georgieva, managing director of the International Monetary Fund (IMF), on Monday said a recession similar to the one caused by the 2008 global financial crisis was expected, with a recovery next year.

So far, about 80 countries have already requested financial assistance from the IMF.

Stimulus

Tom Orlik, chief economist for Bloomberg Economics, said stabilisation in the second half of the year would depend largely on the ability of countries to limit the spread of Covid-19 and provide enough stimulus to make up for lost income.

In a presentation of its economic overview for the first quarter, Old Mutual’s Els said a V-shaped slump was expected – provided that the virus abated over the next three months, that people kept their physical distance and obeyed the restrictions, and that there was no second wave of infections.

If there was a second wave, it would mean a longer recession and a W-shaped growth path, said Els.

He said a V-shaped recovery was already more likely as a result of the announcement of stimulus measures by various central banks, but he was quick to add that more support was needed.

Els welcomed the announcement by the SA Reserve Bank on Wednesday that government bonds would be bought back to relieve a shortage of capital in the country’s finance market.

Annabel Bishop, an economist at Investec, said the central bank’s announcement of the unlimited buyback had lent the rand a little support.

The Reserve Bank’s message that measures would be implemented “until liquidity conditions return to normal” had also brought a degree of calm, said Bishop.

It is feared that up to 1 million people could lose their jobs.

This comes after the central bank’s monetary policy committee surprised everyone last week by dropping the interest rate by 100 basis points.

Els expects that South Africans can look forward to a further decrease of 75 basis points, which could happen before the committee’s scheduled meeting in May.

This, as well as the drop in the fuel price by more than R1 a litre next month, will help consumers, notwithstanding the 25c a litre increase in the fuel levy that will take effect from April 1.

Save money

Els, however, said he also expected pressurised consumers to save more money rather than spend. He proposed that government consider a once-off payment of R200 to each of the country’s 18.3 million citizens who receive a government grant.

That would cost R3.6 billion.

To prevent a worldwide downturn, central banks would have to institute aggressive stimulus measures to prevent financial stress from turning into a debt crisis, said Orlik.

Governments should also spend a great deal of money in the economy to compensate for lost income and to prevent bankruptcies.

Els said this year could be a watershed year for South African politics as it might see Ramaphosa strengthening his position and making firm decisions.

One of these decisions would entail bringing the state’s wage bill under control. According to Els, the rights of 59 million South Africans involved in this crisis should weigh more heavily than those of 3.5 million state officials to claim salary increases in excess of inflation.


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