There are a lot of possible Covid-19 economic recovery scenarios floating around out there, some of them optimistic and others pessimistic.
Many scenarios cite the 2003 experiences of Singapore and Taiwan, when the SARS outbreak battered their economies. Those countries bounced back very quickly once the threat of the SARS virus receded, and so, many economists predict that we will do the same after Covid-19.
But is that a good comparison? After all, SARS affected only a handful of countries and led to far, far fewer deaths and infections. Further, the economic hit from SARS was milder than the Covid-19 hit and – again – confined to a small number of Asian countries (and Toronto, but that’s a long story). Those countries could rely on a healthy global economy once their crisis was over.
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A better comparison may be the 1918 Spanish flu pandemic, which affected far more countries than SARS and killed far more people than Covid-19 (so far). One study from that period of the Swedish economy found that the economic damage from the pandemic was more or less permanent – investment income didn’t start to recover until 1929 (and, at that point, new problems arose in the form of the Great Depression). A broader study of the 1918 flu pandemic found that GDP in affected countries fell by 6-8% and that recovery took around 2 years.
In other words, the broader the crisis, the harder the hit and the slower the recovery. The current crisis is hitting hard and its hitting almost everywhere at the same time. So, what can we expect over the next two years?
Some very early evidence suggests that things are not going to bounce right back to normal. For example, consider restaurant data from the US. The restaurant sector was hit particularly hard by Covid-19. According to the Economist, even before lockdowns were imposed restaurant bookings had plunged – in the state of Georgia, they were down 99% before the state locked down. What’s more, they haven’t bounced back as the states have reopened. Looking at Georgia again, restaurant reservations are still down 84% year-on-year today, even though the state has been reopened for three weeks. The numbers are similar in other states that have reopened such as Florida (down 80% y-o-y), Texas (down 75% y-o-y), and South Carolina (down 67% y-o-y).
In other words, ending stay-at-home orders is not going to get us back to where we were. Activity in Wuhan has recovered, but it is still off its previous highs. People are staying home more, saving more, and businesses are more cautious.
We can expect to see a similar pattern play out everywhere. As countries reopen, people will go out again, but they won’t be as enthusiastic as they were before. They’ll eat out less frequently and be much more reluctant to travel. Spending will be lower, especially because many of the jobs that were lost – an estimated 305 million full-time jobs worldwide – won’t come back in a hurry.
In South Africa, then, Deloitte expects three possible scenarios.
In a best-case scenario, the downturn is sharp but short-lived. The virus is contained and there are relatively few deaths. GDP falls by more than it did during the 2009 recession, but gradually recovers, with the recovery starting towards the end of this year and accelerating in 2021. China resumes its growth path, boosting commodity prices to SA’s benefit, and the downturns in the US and EU are also short-lived. The world is back on track by the end of 2021.
In the medium case, the pandemic hits SA harder, with waves of infections keeping the country in crisis mode. China rebounds slowly and the US and EU remain in recession for a prolonged period as they deal with waves of infection. In this scenario, SA’s recession is deep and lasts for a long time – the recovery only begins in the second half of next year. There are more business failures and unemployment ticks up to 40%. Regaining lost ground takes a long time.
In the worst-case scenario, a prolonged crisis puts unbearable pressure on the financial system and even massive government efforts are not enough to save it. As the financial systems enters a crisis, business failures pile up. The SA economy slumps hard and the downturn is prolonged well into 2022. Borders close and trade collapses, making the pain worse and we experience a global Great Depression – world GDP shrinks by 10% a year for at least two years.
Which of these scenarios will come to pass? Right now, we can hope for the best-case scenario. Europe and the US have started to reopen and, while activity is not back where it was, there are some signs of recovery. China’s aggressive actions seem to have contained Covid-19 there and the country is back at work. Containment efforts and luck also seem to be keeping case counts low in Africa.
But there are no guarantees. A second wave of cases in Europe or a major American city would be devastating – a fresh round of lockdowns could kill many businesses and governments would struggle to keep the lights on. SA still faces a real risk of an uncontrolled Covid-19 outbreak in its crowded mines or informal settlements. Normality is still a way off.
