The two greatest economic catastrophes in the world over the past 100 years – well, up until a few months ago, were the Great Depression and the Great Recession of 2008.
These are well-deserved names for periods that should have reshaped the course of history. I say ‘should’ with particular regard for the latter, as I think the world’s leading central bankers learnt their lessons from the first, and put in place measures to ensure the world doesn’t didn’t fall into as deep a coma as it did after the stock market crash of 1929. Policymakers in Washington, London and Brussels also acted to bail out the world’s major banks, giving rise to the phrase “…privatised gains; socialised losses.”
Their interventions saved the world economy from an extended slump. The US economy soon motored away and, up until the emergence of Covid-19, was on a record-long winning streak. China, meanwhile, continued to underpin global growth, while cushioning emerging markets from the worst effects of the 2008 recession.
All seemed well and back to normal.
This was especially the case in the middle of May 2013, when the world’s leading central banker and boss of the US Federal Reserve could confidently take a step back from the salvation mission and announce a pullback on unprecedented measures such as quantitative easing. But it was at that moment, commonly referred to in market jargon as the “taper tantrum”, that things really began to unravel for emerging market economies and South Africa in particular.
South Africa’s economic crisis perhaps really never ended after the 2008 crisis, it was just delayed by the actions of central bank governors in Washington, London and Frankfurt, the headquarters of the European Central Bank.
For the five years immediately after the ‘Great Recession’, our deep structural flaws – best exposed by the Marikana tragedy and ever-widening inequality – were largely papered over by a flood of cheap money looking for the higher yields being offered locally. On a corporate level, foreign investors in particular looked for the growth our retailers such as Shoprite and Woolworths could offer compared to their ailing giants falling over from the rise of e-commerce and changing consumer habits. It was an interest that only caused heightened hubris in some local corporate boardrooms, leading to some ill-fated foreign expansions in the years that would immediately follow.
In the immediate aftermath of the taper tantrum, emerging market currencies began a more rapid descent against the US dollar, the rand in particular. There was also heightened scrutiny of government finances in this grouping of nations. I think it was in the first and only budget speech that former finance minister Nhlanhla Nene gave in February of 2015 that talk grew of a need for more disciplined approach to spend. This ran against the grand nuclear building plans of his boss then President Jacob Zuma, and in hindsight was the marker for his eventual axing later that year.
From that point, the pressure points on the South African story were suffocating, milking out confidence. The politics of the day – none the wiser to these headwinds – only got worse in the final years of the previous administration. Disciplined politicians know economic data shapes politics. But as Michael Power, global strategist at Ninety One puts it, the opposite is true; politics can make or break the numbers.
And over the past decade, the deterioration in our politics and the rampant corruption that took place under the cover of an ailing 108-year old ANC broke the numbers. The biggest crisis that it triggered was one of confidence. The biggest task for the new guard in the party’s leadership ranks over the past two years has been breathing a fresh bout of confidence into our story that has even exhausted erstwhile allies in China.
It’s a task that hasn’t been tackled well, given the miscommunication around fiscal and monetary policy from the party and a still incoherent strategy around some state-owned enterprises, where senior party members seeking their 15 minutes of fame send different messages depending on their audience. They’ve contradicted each other and in turn, kept confidence levels at their record lows. Who do you believe?
Against this backdrop, the country crashed into a Covid-19 pandemic. A pandemic that has emerged as not only a health crisis but possibly an economic catastrophe that may be as life-altering as the Great Depression itself. Who knows what may come in the next decade?
There are projections of as many as 40 000 deaths over the next four months alone, and over a million possible infections in South Africa in a climate of already record low confidence and a corporate sector that for years has shied away from fixed capital investments. It is, quite simply, a perfect storm.
As much as some lament the length and the severity of what I still think was a necessary lockdown period, a greater challenge lays ahead. As government reacts to the pressures that have been brought to bear by this period and starts allowing more activity, there is likely to be scant demand for workers to meet. Ultimately, their jobs will be at risk with the most conservative figure being of a million job losses to the most extreme, seven million.
The automotive sector has been one of the industries that has pushed hardest to return to full operations, despite record low demand in both the local and international market. Is it worth risking the health of workers for a swift return to man factory gates when there’ll be no sudden surge in demand? There’s no V-shaped recovery in the offing here.
It’s something that we should clearly understand. The the crisis of confidence that began in earnest in the Great Recession of 2008 has snowballed into a South African and global economy bereft of demand. This Thursday, the Reserve Bank may cut rates to lows not seen since the early 1970s, something I’m certain will have little effect on demand in a consumption-driven economy.
This was, after all, a country that was facing an existential crisis before Covid-19.
If we aren’t ready for the immediate health response to the forecasted rise in cases and deaths over the coming months we will face an even longer and deeper winter. It compounds upon our already long laundry list of structural flaws that have weighed on our prospects for more than a decade.
When workers return to their desks or workbenches, they return to a new world even less confident than the one before. What can ultimately change our prospects is to stimulate demand and that comes from increasing confidence levels. Given that we’ve been in arduously slow car crash for more than a decade, it promises to be a long road back and in need of lots of changes in our body politic. During this time, the state and Treasury’s sole purpose is to cushion the most vulnerable in our society.
And it begins with the test of this virus in our winter months but certainly doesn’t end there. But as tests go, the potential loss of thousands of lives over a span of seven months, is the gravest any government can face. If this two-month lockdown and counting helps us avoid the worst forecasts in terms of lives lost, the costs to the economy may be worthwhile in the long run of rebuilding confidence in the South African story.
If not, well, “once more, unto the breach”.
Ron Derby is editor of Fin24.