This year represents one of the most uncertain times in human history, especially economically. This is because, as we have seen since the beginning of the year, the world was hit by an pandemic, Covid-19, that has not only threatened human lives but has also posed a threat to modern life as we know it. As a result of this uncertain future, countries across the world find themselves facing possible economic recessions and even outright economic depressions and are trying their best to prevent this bleak economic future from coming to pass. At this point in time, it is truly anyone’s guess where the world will find itself economically once the world has recovered from Covid-19, especially for South Africa. This is because, even in absentia of the economic uncertainty caused by Covid-19, the South African economy had already found itself facing a technical recession at the beginning of 2020.
My aim here is to outline important concepts that are important in understanding the current economic times we live in, as well as give possible guidelines for preparing for the future that lies ahead.
What is a recession?
One of the first concepts to unpack is an economic recession. As Karabo Rantho cited in “Recessions: The meaning and the implications”, a recession is “…when a country’s economy takes an economic decline for 2 consecutive quarters.” She further goes on to say, “The reason South Africa has been declared to be in a recession is because we have seen the decline in economic performance of 1.4% in late 2019 and 0.8%… in the beginning of 2020.” These percentages were tracking the Gross Domestic Product (GDP) of South Africa, which is simply the total value of goods produced and services provided in a country for a particular year. A recession usually lasts a few quarters.
This internal economic decline by South Africa – it is internal because we are not taking into consideration the external negative economic impact Covid-19 has brought – is one of the reasons South Africa faces a much more uncertain economic future than other countries across the world; the country’s economy is uniquely impacted by these two factors.
What are the effects of a recession?
Since recessions generally indicate a slowdown in economic activity, the ordinary person’s standard of living is lowered. Simply put, for the ordinary person, everything becomes more expensive and individuals tend to find themselves in financial risk.
The following are some of the implications of a recession:
- People’s consumption rate decrease: households and individuals spend less on goods and services and as a result, businesses are negatively affected because of this low spending.
- Businesses cut costs: To make a profit, businesses are forced to cut on unnecessary costs and expenditures, including enforcing retrenchments.
- Unemployment increases: As a result of retrenchments by businesses, unemployment increases across the country.
- Credit availability tightens: Less people are inclined to take up loans during a recession.
- Lowering of interest rates by financial institutions: This is to encourage taking of loans by consumers who are already living on a tight budget.
Famous economic recessions throughout history include the Dot-Com Bubble (2000) and the Housing Bubble (2008).
What is a depression?
Another economic concept to understand is an economic depression. An economic depression can be thought of as a prolonged recession. It has worse economic effects than a recession. If a recession lasts for about 3 or more years, then it is a depression. Alternatively, when the economic performance of a country (the GDP) declines by 10 percent or more, that is also a depression.
Effects of an economic depression?
Since a depression is a more severe case of a recession, the effects almost mirror each other. In times of a depression, the economy slows down drastically to the point of almost completely shutting down. This is because investments into a country decrease, as well as consumer confidence. The loss of consumer confidence is evident when consumers stop buying products and paying for services from companies.
The following are some of the economic indicators of an economic depression:
- Sovereign debt defaults: When a country is unable to pay the debts it owes to other countries or the world banks.
- Bankruptcies: Loss in consumer confidence results in cost cutting by companies. Some companies cannot stay in business even after cutting costs, and so declare bankruptcy.
- Severe increase in unemployment: This is due to mass retrenchments by companies.
- Diminishing output: The country’s production of goods decreases.
- Increase in volatility in currency prices: prices in the currency market fluctuate a lot and more severely.
An example of an economic depression is The Great Depression that happened in 1929.
Why it is important to understand these concepts
South Africa is already in a recession, so the effects cannot be denied or evaded. Recently, Moody’s, a ratings agency, declared South Africa Africa’s economy to be in junk status. What this rating means is that for the short and medium term the country faces a negative economic outlook. Some of the reasons for this negative outlook, as determined by Moody’s, are that South Africa was forced into the 21-day lockdown to combat the spread of the Covid-19 pandemic. Unfortunately, the economic repercussion from this lock down on businesses, big and small, cannot be avoided. Consequently, as a country, we are made to brace for tough times ahead. Currently and in the near future, you’re going to start seeing more of the negative effects of a recession start happening to and around you.
This article was written by Karabo Manasoe.
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