Economic Prospects: Some Observations

This brief offers four observations on the prospects for the South African economy.

1. The prospects for the economy are bound up with the prospects for the COVID 19 epidemic. The simplest model for the epidemic is the SIR model. The population is divided up into the susceptible (S), the infected (I) and the recovered or deceased (R). The evolution of the epidemic is determined by the initial conditions (the distribution of the population today across the three categories), and two parameters, β (beta) and γ (gamma). βrepresents the rate of infection and γ the rate of removal from infection by recovery or death, it being assumed that the recovered are immune from re-infection over the projection period. Without intervention, β and γ reflect the characteristics of the virus: β depends directly on how infectious it is, and γ depends on the rate of removal from the infectious state, and therefore inversely on how long illness lasts. The purpose of intervention is to reduce β (by confinement to home and social distancing) and to increase γ (by isolating the infected, effectively putting them in the R category). The ratio R0= β/γ is the basic reproduction number, which is the expected number of new infections resulting from a single infection in the population. If R0 is less than one, the epidemic dies out. If it is greater than one, the epidemic spreads and the higher R0 is, the faster the spread will be. The problem is that no-one knows exactly what the initial conditions are, or the values of β and γ without intervention, or how β and γ are changed by intervention policies and their effectiveness. This creates the possibility of waves of infection and consequent cycles of intervention. A period of relaxation of confinement (with a corresponding increase in β) may be followed by a period of tightening, as countries attempt to avoid the overwhelming of their health systems The consequence will be a stop-go-stop evolution of the economy.

2. The current controversy between those who support a detailed specification by the state of the types of business that may operate and those that support opening of any business that can operate safely is likely to continue. For now, government policy reflects the views of the first group, but the second group has a strong point in claiming that businesses will know better than the government whether they can meet government specified safety standards. They can also argue that their view will lead to a stronger economy, with fewer constraints on both supply and demand. Short-term economic indicators and indicators of the evolution of the epidemic will sway the distribution of opinion. Continuing sharp drops in output will lend strength to the second group. Rapid spread of the epidemic will strengthen the position of the first group. An expectation of retightened controls will weaken the desire of businesses to re-open.

3. Close attention needs to be paid to the ability of households to obtain the essentials for survival, particularly food. This has both a demand and a supply aspect. On the demand side, much will depend on the performance of two institutions. The South African Social Security Agency has to manage the additional R 50 billion to be distributed over the next six months through a supplement to the child support grant and through a new scheme designed to reach people who are not employed and have no income. The Unemployment Insurance Fund has to cope with a greater number of claims by the unemployed and has also to manage the Temporary Employer/Employee Relief Scheme, designed to keep as many people in employment as possible. The requirement on the supply side is the maintenance of the food supply chain, vulnerable to looting by the desperate and opportunistic. At stake here is not only the welfare of households, but also the ability of the government to impose its will. The coercive capacity of the state is fully deployed, but it is not infinite and it needs to be buttressed by consent. Otherwise, government control may unravel. A government which wants to conserve its power will need to have a generally acceptable justification for every restriction it imposes. Moreover, a number of legal challenges to some regulations and directives have already begun to emerge.

4. The best current estimate of the state of the economy and its short-term prospects is contained in a presentation by the National Treasury to parliamentary committees on 30 April[1]. The Treasury has used three scenarios in its projections. They are:

  • Lockdown: A supply/demand shock at the sectoral level.
  • Lockdown plus: Lockdown plus a macro shock reducing aggregate investment.
  • Full: Lockdown plus and reduced aggregate demand for exports.

A further three scenarios are considered for the speed of economic recovery:

  • Quick: The pandemic is contained quickly and the economy bounces back.
  • Slow: The pandemic takes longer to contain and the economy is slower to recover.
  • Long: The pandemic takes a very long time and recovery is spread over several years.

The table presents the projected impact on key variables:



Lockdown plus


Wage and salary growth in 2020




Tax revenue change as a percentage of pre-crisis tax estimates








GDP growth in 2020




Household consumption growth in 2020




Investment growth in 2020




Employment growth in 2020





South Africa has many more COVID 19 infections than have been registered. Screening of the population is far from complete, the asymptomatic infected will not be referred for testing, and not all those referred for testing will in fact be tested. The epidemic will spread, and it is not guaranteed that the government can adjust the speed of spread in order not to overwhelm the health care system. Expectations are not stable. Models everywhere in the world differ greatly in their projections, and their assumptions need to be understood and discussed. But the Minister of Health has declined to publish projections of the pandemic’s death toll in the country, on the grounds that they are a ‘moving target’, and the projections could be abused for ‘sensational purposes’.

Like Joseph Conrad’s captain[2], we shall have to sail through the typhoon as best we can, taking things as they come.

Charles Simkins
Head of Research

[1] Available at JT_SSeCoFin_Approp_and_SCoPA_briefing_COV19_30042020.pdf and The two sources are not entirely consistent, and the estimates in the Power Point presentation are used here.

[2] Joseph Conrad, Typhoon, Pall Mall Magazine, 1902