Covid-19, China And The South African Economy

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29 May 2020 – The World Health Organization has warned countries to prepare for a global pandemic as the COVID-19 continues to spread. However, as of late February it had not declared COVID-19 a pandemic. The first cases of COVID-19 were reported in Wuhan, China in late December 2019. Since then, there have been major outbreaks in Iran, South Korea and Japan, among others.

To prevent the spread of COVID-19, China restricted movement among its population, affecting at least 500 million people (Reuters, 2020). The lockdown led to reduced economic activity in China, which in turn has impacted both demand for imported raw materials and global supply chains, because the country is a major exporter of both finished manufactured and intermediate products. The key question becomes when and how effectively people will return to work. Some regions of China are lowering emergency response levels and urging people to return to work (Channel News Asia, 2020), but as Palmer (2020) notes, offices and cities remain empty.

Analysts have projected a slowdown in Chinese growth as a result of the COVID-19, particularly for the first quarter of 2020. China’s real GDP growth is expected to fall to 5.4% (Brodzicki, 2020), while the International Monetary Fund (IMF) has projected a decline to 5.6%, both lower than the 6% projected by the World Economic Outlook Update report in January 2020, before the extent of the epidemic became clear (IMF, 2020). Other estimates suggest China’s economy could contract by 2.5% in the first quarter of 2020, and 2% year-on-year (Mjo, 2020).

Consequently, the global growth projection for 2020 was lowered to 3.2% from 3.3% as a result of spillover effects from China. Failure to contain the COVID-19 outbreak over the short term (i.e. by April 2020) will continue to negatively impact the global economy and South Africa, with the worst-case scenario being global recession.

For 2020 and 2021, South Africa’s economic growth has tended to track China’s, mostly because of the importance of China as a market for South African commodity exports. According to IMF estimates, Chinese economic growth was expected to slide in 2020 in any case, largely as a result of the trade tensions with the US as well as some domestic challenges. The projections for 2019 to 2021 as shown in Graph 1 pre-date the COVID-19 crisis, and are therefore over-optimistic.

The implications of the COVID-19 crisis for South Africa, according to IMF research (cited by Arnoldi (2020)) is that a 1% decline in Chinese growth could reduce South Africa’s GDP to 1%. The Reserve Bank has estimated it at 1.2%.

South African exports to China

The Chinese economy has grown significantly (more than doubled) over that past 10 years, climbing from US$50.3 trillion in 2008 to US$108 trillion in 2018. Nevertheless, in terms of growth rates, the Chinese economy has been slowing down in the past five years or so, which has already been a challenge for South African exports. Slower growth in China affects South African exports both because of lower demand and because it has led to lower global commodity prices. Virtually all are commodities that are further fabricated in China, often for re-export to other countries. Source (Tips.org.za)