Never waste a good crisis: lessons from 2008

The narrative that the current Corona virus pandemic is unchartered territory that has not been seen since the Spanish Flu of 1918, has been at the heart of the economic uncertainty around the world. Considering that this point of reference is a little over 100 years ago and the world has changed significantly since then, this pandemic cannot be accurately referenced when seeking solutions to the economic impact of COVID-19. There has to be a more recent global crisis that we can learn lessons from to help us navigate this crisis more smoothly.

South Africa, like many other countries, is awaiting to see the full impact of the COVID-19 pandemic and subsequent lockdown which will become apparent as the economy’s statistical data is released. Recently, South Africa saw its Q1 2020 unemployment rate breach the 30% barrier at 30.1%. Considering that the national lockdown only impacted a few days of Q1 2020, the true extent of job losses is expected to become apparent in future statistical releases. This economic uncertainty has resulted in a wide variety of forecasts being made by various stakeholders across the economy. Some of the most pessimistic views involve economic growth declining by more than 15% and unemployment approaching 50%.  Although the COVID-19 pandemic is novel in its nature, perhaps we could compare the impending fallout to the a global economic recession that occurred as a result of the Global Financial Crisis of 2008. Although the reason for the global recessions differ, the outcome of the 2008 global recession should be investigated to see what South Africa can expect from this global recession?

The tipping point of the 2008 Global Financial Crisis occurred when Lehman’s Brothers went bankrupt in September 2008 which triggered an international banking crisis. This means that the recession was triggered at the end of Q3 2008, hence the full impact was only felt in 2009. Table 1 below illustrates how the global markets and SA were impacted by the 2008 Global Financial Crisis and is compared to the forecast impact in 2020.

Table 1: Global recession impact on economic growth

Region	2009	2020**
SA	-1.5%	-5.8%
World	-0.1%	-3.0%
Advanced Economies	-3.3%	-6.1%
Developing Economies	2.8%	-1.0%

*Source: IMF Data Mapper
**IMF Forecast for 2020.

Three commonalities appear between what occurred in 2009 and what is expected to happen to SA’s economic growth in 2020:

1. SA’s economy entered a recession during both periods.
2. SA’s recession is deeper than that of the world and developing economies and closely resembles the impact felt by the advanced economies.
3. SA’s economic recession is among the deepest recessions in the world as a result of the global recession.

Figure 2 below illustrates what happened to SA’s number of employed people in the four years that followed the Global Financial Crisis of 2008.

Figure 2: South Africa’s Total Employed Q3 2008 to Q3 2012

Figure 2 indicates that it took four full years for SA’s employment levels to return to the Q3 2008 levels (after the full impact of the recession had set in). Employment hit its lowest level since Q3 2008 in Q3 2010, two years after the start of the Global Financial Crisis. Between the start of the Global financial Crisis and Q3 2010, approximately 1 million South African jobs were lost. This means that the decrease in employment took two years before the economy had recovered sufficiently to begin recovering jobs that were lost. The loss of jobs also took approximately a year after the crisis before the largest drop in employment in a single quarter occurred in Q3 2009 (527 000 jobs were lost).

The full impact of the global economic recession is yet to be realised but based on the current economic data and the Global Financial Crisis’ economic data, we can forecast what is to be expected. South Africa tends to be one of the hardest hit economies during difficult global economic conditions. In 2009, South Africa’s economy contracted by -1.5% while the average growth for developing economies was 2.8% (IMF). South Africa’s economic contraction of -1.5% sat in the middle between the global figure of -0.1% and the -3% average experienced by the advanced economies (IMF). These results saw the South African economy shed approximately 1 million jobs at the peak of the economic impact.

According to the IMF, SA is expected to contract by -5.8% in 2020. This is in comparison to the developing economies which anticipate a contraction of -1%, world that is expecting a contraction of -3% and the advanced economies that are expecting a contraction of -6.1%. Once again South Africa appears to be one of the hardest hit developing economies. The SA economic impact is expected to mirror that of the advanced economies, as was the case in 2009, despite it being considered a developing economy.

If SA does contract at the level that the IMF anticipates (-5.8%) then this recession will be approximately four times deeper than the recession of 2009. If the impact on employment mirrors this trend on economic growth then as many as 4 million jobs may be lost in the coming years.

The rate at which jobs were lost as a result of the Global Financial Crisis should prepare us for a similar delayed reaction in terms of the poor economic state translating into job losses. We can expect the peak of job losses to be two years from now and that the economy will take more than four years to recover. Unfortunately the worst is yet to come in terms of unemployment as the poor economic conditions continue to erode business’ ability to survive. But knowledge is power and we can at least plan to mitigate the negative effects we will need to navigate in the next few years.

Bryden Morton is executive director and Chris Blair CEO at 21st Century