MPhil in Development Finance final-year students at USB, Livingstone Banga and Nii Darko Otoo, explored the connection between the spread of COVID-19 and a global recession. They delved into how this devastating domino effect could impact the future of Africa’s development. This article first appeared on the online publication The Zimbabwe Independent on 20 March 2020.
Historically, the world has experienced a recession, on average, once every decade. The major and most recent ones were the 1975 recession caused by the rising oil prices of the Organization of the Petroleum Exporting Countries (OPEC); the 1982 recession, which came about as a result of the United States Federal Reserve’s tight monetary policy to combat rising inflation; the 1991 recession caused by the oil price shock, and loss of consumer and business confidence; and the 2009 recession caused by a subprime mortgage crisis.
Global recessions do not just happen; they send warning signals.
A global recession happens when most or all of the world economies experience a slowdown in economic activity at the same time for an extended period of time. Global recessions do not just happen; they send warning signals. Certain economic indicators – such as unemployment trends, increased inflation rates, a slowdown in international trade, and an inversion of the yield curve in the bond market – have proven over time to predict a looming global recession.
The US unemployment rate has been hovering below 4% for the past year, reaching a 50-year low of 3,5% four times during the past 12 months. In the previous four recessions, unemployment rates reached record lows of below 6% when these recessions were striking. The US-China trade has been dropping over the past two years with a drop of close to US$200 billion in value in 2019 alone.
The yield on long-term bonds should have a higher yield than the yield on short-term bonds. When this economic principle is broken, a recall on long-term financial commitments to invest in short-term securities unsettles the market and a financial crisis (illiquidity) is bound to happen as borrowers will need to pay immediately what could have been long-term payables.
The yield on a US 10-year Treasury Note fell below the two-year bond’s yield several times during the past year, thus prompting some investors to recall their investment in long-term securities. This phenomenon, called an inversion of the yield curve, usually precedes a recession.
The global economic giants US and China have been waging trade wars on each other over the past year. Although they seem to have found a compromise, the economic impact of the exchanges was adverse for the global economy. These and other indicators have reached recession levels for over a year, and the global recession has long been overdue.
What can trigger a global recession?
The world’s second biggest economy, China, has been hit by coronavirus (COVID-19). This is a Severe Acute Respiratory Syndrome Coronavirus-2, a new strain that had not previously been identified in humans. As a new virus, no vaccine has been identified as yet and, according to US health experts, it will take at least a year to produce one. COVID-19 has spread from China to over 176 countries in less than 60 days. Over 60 million people have been quarantined in China and over 16 million people have been quarantined in Italy.
The International Energy Agency (IEA) expects global demand for oil to be down 2,5 million barrels per day, highlighting a slowdown in global economic activity. China oil demand went down by 1,8 million barrels a day, year-on-year, in the first quarter of 2020, indicating a major slowdown in Chinese economic activity.
Most economic activities have been suspended or banned in China, Italy and across the world. The US and China control close to 40% of the world’s economy and the two countries’ trading activity is also the highest in the world. Any adverse or positive economic activity in these two countries is set to have a ripple effect on the global economy.
Africa’s response to past recessions
Africa has its own challenges, which include having the lowest human capital development in the world, inadequate public infrastructure, poor governance, and energy and water problems. Over the past century, Africa has become interlinked with the world economies as developments in technology and transportation have made it easier for the movement of people, goods and services. Any negative economic activity on the global scale is sure to make Africa as a continent feel the effects as well.
Historically, statistics indicate the inability of the African continent to buffer itself against such a phenomenon.
Historically, statistics indicate the inability of the African continent to buffer itself against such a phenomenon. In the 1981-1982 recession and the 1991-1992 recession, sub-Saharan Africa’s Gross Domestic Product (GDP) was -0,2% and almost -2% respectively. Sub-Saharan Africa was not excessively affected by the 2008-2009 recession as its GDP dropped, but still remained in the positive at over 3%.
Global trade wars, such as the US-China trade war, including additional barriers imposed to reduce international trade, are causing a decline in economic growth in many countries. Import and export disruption is beginning to be felt worldwide, especially in the electronics sector and motor industry given China’s major role in components manufacturing and assembling. Within these past few weeks, commodity prices have come under pressure with crude oil prices plunging to 2008-2009 levels.
Can SA and Zimbabwe cope?
South Africa, one of Africa’s biggest economies, managed to buffer itself against previous global economic shocks. However, the political and economic environment in the country has drastically changed since the last recession.
The most possible scenario will be the scrapping of the local currency like what happened in the 2008 – 2009 period. A combination of poor health facilities and an unfavourable economic environment will sink the country deeper into both economic and social mess.
Budget deficits, electricity shortages, debates of land expropriation without compensation, political bickering, among others, have unsettled investors, negatively affecting the country’s economic prospects and also making the country susceptible to global economic shocks. The environment is aggravated by the COVID-19 virus global pandemic. South Africa has recorded 174 confirmed cases as of yesterday (20 March 2020). With a slowdown in global trade over the past month, the rand has weakened from about R14,80 to the US dollar in early February to R16,81 at the time of publication. It is expected that the rand will devalue further if the effects of a global recession sink into the already volatile economy.
The Johannesburg Stock Exchange-listed companies lost a significant percentage of value recently and the downward spiral is continuing. After recording 61 confirmed cases of COVID-19, of which 10 cases were local transmissions by 17 March, the South African government has set stringent measures which included a travel ban on tourists from high-risk countries, border closures, school closures, and limitations on crowd gatherings, among others, to combat the spread of the pandemic.
Will Zimbabwe follow suit or it will have to wait for COVID-19 cases to be confirmed? Will Zimbabwe be able to handle 100 cases or more of the COVID-19 virus and how will the largely informal market, which depends on South African imports, respond to a closure of the Beitbridge border post?
Weak African economies such as Zimbabwe are likely to face the severe brunt of the effects of a global recession and coronavirus. Around 75% of Zimbabwe’s total exports and 40% of its imports are done with South Africa. Any slowdown in the South African economy is most likely to negatively affect Zimbabwe.
Zimbabwe has not been economically stable for the past two decades and a global recession is set to have tremendous effects on the economy and the people who live in it. Previously recorded data indicated that the country’s GDP hit extremely low levels during global recessions.
In the 1981-1982 recession, GDP fell from about 13% to 3% in 1981 and 1982; in the 1991 global recession, GDP fell from roughly 5,5% to -9% in 1991 and 1992, and in the 2007-2008 global recession, GDP fell from -4% to -18% in 2007 and 2008.
Based on historical experiences, the country has lost about 10% of GDP every time a global recession has happened. With the GDP growth hovering below 4% for the past four years and a global recession looming, Zimbabwe can expect its GDP to fall by more than 10% this year alone as the underlying conditions have changed for the worst.
The country is facing a myriad of problems like daily electricity blackouts in most parts of the country, poor water quality and distribution in most cities and towns, and high unaffordability of telecommunications by the general populace. When the economy contracted in recession times, energy, communication and water crises were not as bad as it is at the moment. The current infrastructural and affordability gap is disastrous for the country and the ordinary inhabitant.
The local currency has been losing value from an exchange rate of ZW$3 to the US dollar in early 2019 to the current bank rate of ZW$18 to the US dollar or informal black-market rate of ZW$45 to the US dollar. The chances are high that such an unstable currency will lose more value when a global recession comes into play. The most possible scenario will be the scrapping of the local currency like what happened during the 2008-2009 period. A combination of poor health facilities and an unfavourable economic environment will sink the country deeper into both economic and social mess.
What can Africa do?
The looming global recession is unique and disastrous in that it affects both the economic and social aspects of a continent. Businesses are expected to scale down operations or eventually close down, thus negatively affecting employment and household incomes, with a downstream effect on the informal market. Worker lay-offs will most certainly happen as revenue falls and costs either increase or remain the same against dwindling incomes. Further deterioration of the local currencies is expected as investors move their investments from the fragile emerging economies to more stable developed economies.
Governments willing to do “whatever it takes” to stabilise economies in response to the COVID-19 outbreak must increase utilisation of their resources towards health care. In the short-term, public health concerns should be a priority over increased public debt.
A strain on the already deplorable African health system is inevitable and, if left unattended, Africa’s health system will sink deeper into a crisis and loss of lives will be a certainty. With the current economic challenges, private spending on health care might be the ideal panacea to managing both the spread of COVID-19 and proffering a long-term solution to the stability of Africa’s economies.
Governments willing to do “whatever it takes” to stabilise economies in response to the COVID-19 outbreak must increase utilisation of their resources towards health care. In the short term, public health concerns should be a priority over increased public debt. Fiscal measures should be geared towards providing free healthcare to those affected by the virus as an obvious response, as well as lenient tax requirements towards those hit by a sudden loss of revenue, especially in the informal economy.
While our appeals for increased public spending often raise fears of profligacy and subsequent financial trouble, there is a risk of a further drop in investor confidence. The combination of an aggressive monetary policy and fiscal interventions leave private investors in a “wait-and-see” position and encourage speculative trade as Africa’s sovereign borrowing rates may increase.
Indeed, since the global financial crisis of 2008-2009 and during times of low economic growth, African governments accumulated record levels of debt. Public debt across sub-Saharan Africa has surged by an average of 20% of GDP since 2010, nearing an average of 60% of GDP across sub-Saharan Africa in 2019.
On the part of the central banks, monetary policies ought to be directing credit towards production and employment creation, such as strengthening infrastructure or providing tailored credit lines to distressed small to medium enterprises (SME). The greater the virus-related disruption, the more distressed the SME sector will be.
African governments should immediately take crucial steps such as suspending all public gatherings, and curtailing travel and the movement of people to prevent COVID-19 from spreading. While the situation continues to evolve, companies are encouraged to take prudent steps to ensure business continuity given that ultimate progress of COVID-19 continues to negatively affect the world’s economy.
Livingstone Banga is a banker based in Zimbabwe and an MPhil in Development Finance final-year student at USB.
- Nii Darko Otoo is a facilities management practitioner based in Ghana and an MPhil in Development Finance final-year student at USB.