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31 May 2009 06:00
The drop in the gross domestic product (GDP) in the first quarter of 2009 made headlines this week. It shows that—unsurprisingly—South Africa is not immune to the worldwide economic downturn.
But the standard presentation of the data tends to exaggerate the problem, and the stimulus package tabled by the government towards the end of 2008 has helped somewhat.
South Africa’s GDP dropped 1,5% in the six months to March. The heaviest effect has been felt in the mining value chain, including basic metal manufacturing because of its export orientation, housing construction and the auto industry, which faces a decline in demand at home and abroad of at least 25%.
Given South Africa’s unusually high levels of inequality and joblessness, any slowdown in the economy can have devastating effects on the poor. Moreover, this is the first recession in 17 years.
Still, the decline is not close to the levels of, say, the Great Depression, when the GDP shrank over a quarter in the course of several years. Moreover, it is about half the drop in output in the global North over the past six months.
Most observers have focused on the more impressive claim that output shrank by 6,5% in the first quarter of 2009. Yet this number represents not how much production actually dropped, but rather the amount the GDP would fall if the first quarter’s rate of decline continued throughout the year. That seems unlikely.
The good news is that the drop in output has not been matched by job losses. Unfortunately, unlike GDP figures, the employment data are not seasonally adjusted, making comparisons difficult.
In the last quarter of 2008 employment rose by only 0,3%, much slower than usual for the period, which is usually pumped up by Christmas sales. In the first quarter of 2009, formal employment dropped by 90 000, or just less than 1%.
It is terribly hard for workers and their families to lose any job. Still, job losses so far—knock on wood—have been smaller than feared.
For comparison, the United States lost four million jobs, or 3,5% of its total employment, in the year to March 2009. In Ireland, which has one of the hardest hit economies, unemployment is expected to jump from 1% to more than 15% in the coming year.
The public response to the crisis in the US has been particularly panicky because the downturn has had a direct impact on the savings of the huge middle class, as well as bringing down major companies. Estimates suggest that, between losses on pensions invested in the stock market and a fall of almost 20% in house prices, the average US household has lost 25% of its nominal assets.
In contrast, in South Africa the fall in housing prices has been far smaller, and only 40% of workers have private pensions.
The government, in agreement with organised business and labour, has adopted a package of measures to limit the effects of the downturn on growth and employment. The available data suggest this strategy has ameliorated the downturn, although it is impossible to tell by how much.
The central element in the national response to the crisis was the adoption of a counter-cyclical fiscal policy, with the deficit jumping to 3.8% for 2009/10. In effect, government decided not to trim its spending plans, even though the downturn reduced its revenues. That, in turn, has helped maintain domestic demand. Monetary policy, which is driven by the independent Reserve Bank, has been notably slower in responding to the downturn.
At the programmatic level the national response to the crisis has had five main thrusts: sticking to planned improvements in infrastructure, encouraging more local procurement across the state, providing some funds for companies affected by the crisis through the IDC, discouraging retrenchments, and maintaining the social safety net. These measures contributed to relatively strong growth in both construction and government services in the first quarter of 2009, despite the overall fall in the GDP.
This strategy cannot sustain the economy if very slow growth persists at the global level for several more years. If revenues do not recover in 2010 the government will face some very tough choices.
In the longer run, the global crisis calls for a serious review of South Africa’s industrial strategy. The export-oriented industrialisation strategy pursued in Asia, which has shaped modern thinking about development, was predicated on a limitless market in the global North, particularly in the US. Whether or not that model was ever suitable for South Africa, it seems unlikely to be a realistic option for the foreseeable future.
Neva Seidman Makgetla is lead economist for research and information at the Development Bank of South Africa
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