Business Maverick Op-Ed
The impossible task of forecasting South Africa’s economic future
Forecasting has never been easy and economists have been mocked in the past for their chequered history of predicting economic outcomes. The Covid-19 crisis has thrown a curveball that has resulted in a ‘sudden and massive divergence’ in economic growth projections. Instead of discounting the reliability of these forecasts, we should understand how economists got there and what risks they see standing in the way of a desperately needed economic recovery.
Economists have faced extraordinary challenges in predicting the likely impact of Covid-19 on global and local economies, both in terms of the extent and length of the fallout and subsequent recovery. Forecasts that are usually clustered in a relatively tight range around the median have widened to unusual extremes.
At the end of April 2020, the gap between the most optimistic second-quarter US growth forecast (-8.5%) and the most pessimistic (-65%) was a staggering 56.8 percentage points, according to a recent Harvard Business Review article exploring why economic forecasting is so difficult during the Covid-19 pandemic. Say authors Arne Pohlman and Oliver Reynolds: “The spreads observed in recent weeks are by far the widest recorded since we started covering the US a decade ago.”
Pohlman and Reynolds attribute the “sudden and massive divergence in macroeconomic projections” to:
- The economic impact and speed of policy changes, which have never been higher.
- The Covid-19 pandemic undermining the reliability of economic data, which is the bedrock of any good macroeconomic model.
- Economic forecasters needing to develop an understanding of epidemiology and how it will affect the pandemic’s trajectory.
Predictions may not have been quite as divergent as this in South Africa, but local economists have also had to revise growth predictions several times in a matter of months as new data and evidence becomes available.
Citibank economist Gina Schoeman says in the early weeks of the crisis, there was a flurry of forecast revisions, as economists responded to any data that gave an indication of the extent of the pandemic and its likely impact on the economy. She revised the bank’s forecast three times during this period, but says she has seen forecasts settle down as knowledge about the crisis has improved.
Early in the crisis, the most “optimistic” 2020 growth forecast of the three economists surveyed by Business Maverick was BNP economist Jeff Schultz’s -4% versus Schoeman’s -10.1%. Two months later, the forecasts had deteriorated considerably as the extent of the damage of the lockdown became more apparent.
Sanlam Investment Management economist Arthur Kamp, who expected 2020 growth to decline by 5% at the end of March 2020, now foresees an 8% decline. Schultz reduced his early April forecast by 4.5 percentage points to -8.5% and Schoeman became marginally less pessimistic, narrowing her anticipated decline in growth by one percentage point to -9%.
… “We all agree that 2020 is going to be a terrible year. Next year, consensus expectations are for about 4% growth. Our forecast is slightly more pessimistic at 2.3%. However, I am concerned even this may be too optimistic if the effectiveness of policy measures is limited and the erosion of GDP takes longer to recover.”
Kamp describes the challenge of making economic forecasts in the current environment and what value he believes they offer: “Overall, you have to make bold assumptions and material changes to the forecast seem likely as more information becomes available. Ultimately, the best I can hope to do is to provide some sense of the scale of the fallout and the likely path/shape the economy will take going forward.”
Schoeman expects the next event most likely to prompt another flurry of revised forecasts is when Finance Minister Tito Mboweni delivers the June 2020 mini-Budget because economists are waiting to see what the fiscal situation looks like.
However, the state of the South African government’s finances is not the only downside risk that could play havoc with current economic growth forecasts. Schultz says the possibility of a second wave of infections coming through is a material risk. The economy is opening as South Africa goes into winter and it is one of the few countries that is coming out of lockdown with infection rates still rising. He says a second wave in the fourth quarter, either globally or in South Africa, would result in a W-shaped growth path, which would be even more damaging.
He is even more worried about growth in 2021 than 2020. “We all agree that 2020 is going to be a terrible year. Next year, consensus expectations are for about 4% growth. Our forecast is slightly more pessimistic at 2.3%. However, I am concerned even this may be too optimistic if the effectiveness of policy measures is limited and the erosion of GDP takes longer to recover.”
Schultz says behavioural changes in the way consumers operate and companies do business could be far-reaching and long-lasting. He is worried the economy may experience a negative feedback loop in which consumers are reluctant to take on more debt, undermining the effectiveness of the monetary policy response to the crisis and resulting in even higher unemployment.
The first downside risk Schoeman mentions is load shedding. “It is more worrying than usual because we still have warnings that the system is under strain even though economic activity has been reduced by the lockdown.” Top of her downside risks is also government losing credibility if it fails to put in place a credible plan for stabilising its debt through growth and reforms.
“South Africa stands to lose a lot if rating agencies lose confidence in the country’s institutional strength,” she says. “And further downgrades into junk territory would double government’s problems and likely result in government needing a full IMF programme, not just a funding facility.”
Kamp says it is difficult to determine how long it will take for all production to return and there is a risk that South Africa could experience a permanent loss of production. “There are many known unknowns here. Much depends on the future path of infection rates and to what extent firms will shut down intermittently to comply with health regulations. I don’t know.”
Another downside risk, he says, is whether banks will be willing to lend to the private sector amid such a high level of uncertainty, even though bank regulations have been eased to facilitate lending. He says this is where the government’s guaranteed lending scheme is important because the guarantee may provide that incentive.
With so many moving pieces locally and globally, and countless known and unknown risks, the forecasts that economists have on the table right now are more than likely going to be subjected to further revisions as economists and policymakers muddle their way through unprecedented territory over the next couple of years. Kamp’s concluding remark is: “Spare a thought for policymakers who must set interest rates and draw up budgets amidst all this uncertainty.” DM/BM