The socio-economic impact of the global downturn on South Africa: responses and policy implications

Abstract

The report starts with a discussion of the channels through which the global economic crisis (GEC) was transmitted to South Africa. Unlike other emerging economies where the impact was largely transmitted via decreases in traded manufactures and remittances, the impact in South Africa was mostly experienced through decreases in private capital inflows, commodity exports, and reductions in trade revenues. More recently, some of these have already reversed. For example, the recent appreciation of the rand has been attributed to an increase in private capital flows in search of higher returns outside of the US and Europe context of loose monetary policies.. However, and perhaps partly as a result of this appreciation, employment was continued to fall in 2010 albeit at a slower pace. Section 2 of the report then looks at the economic impact of the crisis in South Africa and highlights that before the crisis South Africa had enjoyed a period of relatively high growth, which saw real Gross Domestic Product (GDP) averaging 5.5% between 2005 and 2007. By the end of 2008 the economy went into recession for the first time in 17 years with real GDP falling by 0.7% in the fourth quarter. There was no respite in 2009 as GDP fell by 7.4% and 2.8% in the first half of the year. Since South Africa?s growth over the past few years has been fuelled, amongst other things, by the commodity `super? cycle, growth prospects in the near future will remain weak as uncertainty continues to plague the global economic recovery. Though this places a greater burden on government expenditure to stimulate economic activity, it also raises serious questions about the sustainability of such a fiscal stimulus more so in the face of falling employment and company closures which may have an important impact on tax revenue going forward.