Livingstone Banga & Nii Darko Otoo
Historically, the world has been experiencing a recession, on average, once in every decade. The major and most recent ones have been in 1975 caused by the Organisation of the Petroleum Exporting Countries (Opec)’s raising of oil prices, the 1982 recession which came about as a result of the United States Federal Reserve’s tight monetary policy to combat rising inflation, 1991 recession caused by oil price shock and loss of consumer and business confidence and the 2009 recession caused by a subprime mortgage crisis.
A global recession is when most or all of the world economies experience a slowdown in economic activity at the same time for an extended period. Global recessions do not just happen; they send warning signals. There are certain economic indicators such as unemployment trends, increase in inflation rates, slowdown in international trade and inversion of the yield curve in the bond market among others that have proven over time to predict a looming global recession.
The US unemployment rate has been hovering below 4% for the past year and reaching 50 year low of 3,5% four times in the last 12 months. In all the previous four recessions, unemployment rates would have reached record lows of below 6% then a recession strike. 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 a yield on a short-term bond. 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 bonds yield several times in the last year, thus prompting some investors to recall their long-term 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 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 been previously identified in humans. As a new virus, no vaccine has been identified yet and, according to US health experts, they postulate a period of 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 ripple effects on the global economy.
Africa’s response to past recessions
Africa has its own challenges that include lowest human capital development in the world, inadequate public infrastructure, poor governance, energy and water problems among others. Over the past century, Africa has become interlinked to the world economies as developments in technology and transportation has made it easier for movement of people, goods and services. Any negative economic activity on the global scale is sure to make Africa as a continent face the effects as well.
Historically, statistics indicate the inability of the African continent to buffer itself against such a phenomenon. In 1981-82 recession and the 1991-92 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, had 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.
Budget deficits, electricity shortages, debates of land expropriation without compensation, political bickering among others has unsettled investors thus negatively affecting the country’s economic prospects and also made the country susceptible to global economic shocks. The environment is aggravated by the Covid-19 virus global pandemic. South Africa had recorded 150 Covid-19 virus confirmed cases as of yesterday. 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 global recession sink into the already volatile economy.
The Johannesburg Stock Exchange-listed companies lost quite a significant percentage of value in the last week and the downward spiral is still continuing.
After recording 61 confirmed cases of Covid-19 virus of which 10 cases were local transmissions by Sunday, the South African government set stringent measures that included a travel ban on tourists from high-risk countries, border closures, school closures, limitations on crowd gathering, 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 Covid-19 virus and how will the largely informal market depended on South Africa 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 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 went extremely down in the years when a global recession happened.
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 lastly in 2007-2008 global recession, GDP fell from -4% to -18% in 2007 and 2008.
Basing on historical experiences, the country loses about 10% of GDP every time a global recession happens. With the GDP growth currently 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, that is 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 among others. When the economy contracted in recession times, energy, communication and water crisis were not as bad as currently is the case. 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. There are higher chances that such an unstable currency will lose greater value when global recession comes into play. The most possible scenario will be the scrapping of the local currency like what happened in 2008-2009 period. A combination of poor health facilities and unfavourable economic environment will sink the country deeper into both economic and social mess.
What can Africa do?
The looming global recessions is unique and disastrous in that it affects both the economic and social side of a continent. Businesses are expected to scale down operations or eventually close down thus negatively affecting employment, household incomes and having a downstream effect on the informal market. Workers lay-offs are most definite to 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.
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 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 2008-09 and during times of low economic growths, African governments accumulated record levels of debt. Public debt across SSA has surged by an average of 20% of GDP since 2010, nearing an average of 60% of GDP across SSA 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 start taking crucial steps such as suspending all public gathering, curtailing travel and movement of people to prevent the 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 the Covid-19 continues to negatively affect the world’s economy.
Banga is a banker based in Zimbabwe and is a Master of Philosophy degree in Development Finance final year student at Stellenbosch University. — firstname.lastname@example.org and Otoo is a facilities management practitioner based in Ghana and a Master of Philosophy in Development Finance final year student at the same university. — email@example.com