With the right policies, at least pain will not be self-inflicted

First Published in Business Bay on   May 22nd, 2020   |   by   Isaah Mhlanga

With the right policies, at least pain will not be self-inflicted
Business Day

South Africa’s post-COVID-19 economic recovery will depend on several factors, many of which are within the policy maker’s control and others that policymakers will have no control on. For an economy with roughly 60% accounted for by household consumption from an expenditure side, consumer confidence will be critical for the recovery in economic growth. However, this time around, consumer confidence will likely remain depressed and driven by factors that policymakers cannot directly control. This implies that economic growth will not recover quickly even if  the economy is opened up quickly.    

The recovery in consumer confidence will depend on two critical factors; one of which can be impacted by economic policymakers while the other is independent of economic policy.  The first factor, that can be impacted by policymakers, is job security and job prospects once the crisis is over. In the current environment, with thousands of companies expected to close shop, job security is possibly at its lowest since the dawn of democracy. The loss of jobs, which we currently estimate to be a minimum of 1.7 million, and associated income loss will push consumer confidence lower than where it is currently. 

Job insecurity implies that even the proportion of consumers that still have spending ability will not spend. Discretionary savings are likely to increase and remain elevated as long as the economic recovery has not improved jobs prospects. Historically, consumer confidence has led business confidence going down and going up. Which mean that the low consumer confidence will be followed by a fall in business confidence as reduced consumer spending will result in poor profitability for consumer-facing corporates, especially for non-essential goods and services.  This, in turn, mean a decline in business confidence will lead to a delay in fixed investment and therefore job creation. 

The downward spiral from low consumer confidence to business confidence is a puzzle that can be short circuited by the policymaker, through sound economic policy, which will encourage spending on critical infrastructure, the funding of which can be done through the fiscus and the private sector including institutional investors. We will provide the prerequisites for institutional investors in future writings. 

The second factor that will be crucial for the recovery in consumer confidence and economic growth even after job security and prospects have improved, is how long the underlying COVID-19 health crisis will take to resolve. In Italy where mass burials are common due to COVID-19 related fatalities, people stay indoors not because the government forces them to do so, but because of fear. With the projections of infections, fatalities expected to reach 48 000 by November in a worst-case scenario, as recently presented by the Minister of Health and his team. In that scenario, fear will likely sweep across the country such that even after the health crisis is resolved, it is plausible to expect that consumers will unlikely to feel safe immediately. Sure, I love wine and the majestic views that Cape Town offers, but I will not be taking any flight there for some time, no matter how much protective masks I may have. I can guess that a lot more people will feel the same. 

Unfortunately, the fear factor is independent of economic policy. More so, not even the best experts on health globally have an idea when a vaccine will be ready. To make matters worse, the opening of economies will increase the risks that infections will rapidly rise again even in regions that would have seen a slowdown in new cases. 

What this means is that policymakers must do everything in their power to make the right policies so that if external factors do impede on the economic recovery, it will not be a repeat of the last decade where it was self-inflicted but truly something uncontrollable. Failure to do that will come with economic and political instability for years to come. 

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