South Africa : Chances of an L-Shaped Recession
By: Ryan Gosha
Tags: Coronavirus, L Shaped Recovery, Covid 19, Recession, South Africa

This is a follow-up article to V-shaped or U-Shaped Recovery.

COVID19 and the Credit Rating Downgrade are laying havoc on the South African economy. What are the chances that South Africa will never recover from this? Or to phrase it better, what are the chances that South Africa will not get back to the 2019 GDP level in the next 10 years? Can we lose a decade or more?

Usually, this discussion will be framed in the context of a GDP growth rate (in percentage) on the vertical axis and time (in quarters) on the horizontal axis . For this one , we will use absolute GDP numbers on the vertical axis and years instead for quarters on the horizontal axis. The damage the economy has taken takes the discussion beyond a few quarters.

I will briefly hoover-over the following areas of concern and then weigh-up the chances:

Impact of COVID19 to the economy, how low will GDP fall? Impact of Credit Rating downgrade on the economy IMF loan. Land Reform Currency Collapse Extended Commodity Super Cycle Downswing So what are the chances?

But first ,the definitions and overview.

An L-Shaped recession curve is the doomsday scenario. The economy drops sharply and the drop is followed by a constant-line trajectory. In short the economy does not recover for years and years. Its the Zombie Apocalypse for economists. Its a painful issue to process and put into written words, unless if you are a schadenfreude and you really enjoy watching the country burn. I am an optimist but sometimes it is good to give yourself a healthy dose of reality.

Lets get into it, lets see the examples of L-shaped curves. The following examples use United States Dollars as the measurement currency because it takes into account currency weakness and strength, which makes sense in a globalized world where currency stability matters because it directly affects lives via imports and exports. Real GDP measured in local currency only takes into account domestic inflation.

Example 1: Algeria

Algeria L-Shaped recession ,lost decade. GDP measured in USD. This shape looks roughly like an L, GDP returned to the 1990 level in 2003.

Example 2: Brazil

Brazil is an example that is much closer to the level of South Africa because both of these countries make part of BRICS.

Brazil’s GDP in USD terms dropped sharply in 2014 and has never recovered.

Using Brazilian real , GDP is said to have contracted by 8% but in USD terms the contraction is actually 26.5%. That’s a quarter of GDP wiped out. Brazil is still going its lost own lost decade. COVID doesn't make things better.

SA GDP

Below is SA GDP from 1960. Its generally an upward and onward trajectory, except for the last decade.

SA GDP in USD from 1960 to 2018

Lets zoom in from 2011 (just after the World Cup).

SA GDP was declining from 2011–2016 and picked up in 2017 and 2018

In 2011, SA GDP was 416 billion dollars , in 2018 SA GDP was 368 billion dollars. Its a massive drop. According to Trading Economics , SA GDP for 2019 was USD350 billion.

So we will take 2019 GDP of $350 billion as our point of reference and ask how long will it take for the economy to get back to that level. Some might argue for using our highest USD GDP peak in 2011 of 416 billion as the proper point of reference. For argument’s sake lets develop selective amnesia ignore the distant past that some analysts refer to as the “Zuma Years”.