Macroeconomic; Policy & Financial
Markets
(ECF511E)
Assignment 1
Samkelo Mtyaphi
For:
PROF A TSEGAYE
Submission date: 8 May 2022
Student No: 201927545
Contents
Introduction............................................................................................................................................ 3
South Africa preamble 2007-2008 global financial crisis and Covid-19 ...................................... 3
Comparing socio-economic impacts of the 2007-2008 global financial crisis and Covid-19 in
South Africa ........................................................................................................................................... 4
Economic Growth ............................................................................................................................. 4
High unemployment rate ................................................................................................................. 5
Increase in Commodity Prices and Social Assistance ............................................................... 6
Recommendations ............................................................................................................................... 7
Conclusion ............................................................................................................................................. 7
References ............................................................................................................................................ 9
Introduction
Over the years there has been plenty of crisis in economy that caused the economy
global to collapse. Of course, some of the notable global crises were The Great
Depression, 2008 global financial crisis and Covid 19. That said, there has been
debates whether which crise had more impact in each country. From this stance, it
has become clear that Covid 19 did not only have a catastrophic effect on financial
sector but on the health of the people as well. All things considered; South Africa’s
economy has always been vulnerable to these crises because it is deemed as a
developing country. This paper the compares socio-economic impact of the 2007-2008
global financial crisis and Covid-19 on South Africa. The crisis of 2007–2008, which
was initially brought on by a record-breaking increase in credit availability and house
prices in the US, quickly spread to other nations, namely South Africa. Whereas Covid
19 was primarily brought by a disease called coronavirus that commenced in China
and spread to other countries. These crises caused growth to slow, increased inflation,
enormous jobs were lost in the process (Musyoka, 2020).
South Africa preamble 2007-2008 global financial crisis and Covid-19
In the year 2006 and 2006 South Africa’s gross domestic product saw an increase of
5.6% and 5.4% respectively. On these two mentioned years that pursue global
recession, it is notable that South Africa’s economy had been growing at a speed rate
in when compared with any year since 1994. In 1994, the unemployment rate was
projected at 30.14%, however, in 2006 it was projected at 28.49% and decreased in
2007 to 26.67%. Furthermore, in 2006 the government debt to GDP was notable as it
was projected at 36.36%, very much less to China’s 45% during that period. Prior to
the global financial crisis, South African macroeconomic policies projected a thriving
economy. In comparison, the economy of 2007-2008 and the economy of 1994, all
macroeconomic policies projected a good growth in the economy respectively. In
2009, real GDP growth projected a contraction of 2% in the first two quarters of the
same year. Around 500 000 people were left without employment and large number
was cornered to make an alternative between low incomes and also heavy loads of
debt. Naturally, the recession's effects were evident given South Africa did not
experience this contraction in 17 years. It was first of its kind (Musyoka, 2020).
Comparing socio-economic impacts of the 2007-2008 global financial crisis and
Covid-19 in South Africa
Economic Growth
South Africa was on the experience of ever booming economy for the longest period
and this was maintained. However, South Africa experienced a massive slump in
economic growth which was characterised by the initial two quarters of the year 2009,
the gross domestic product projected a decrease of 7.4% and 2.8% respectively. This
was notable as it made the economy to be in recession for the very first time after 17
years. In general, the South African economy projected a fall of 1.8% in 2009.Due to
some empirical research, South Africa registered contraction in real GDP growth rate
that is said to be worst decline in real GDP growth rate on a single year of 2008 and
2009 and the contraction was worst in most growing and emerging economies of other
nations. Half yearly in 2009, GDP depicted a decrease by 7.4% and 2.8% in the first
two quarters of the same year. The catastrophic consequences was caused by a
contraction in output levels of sectors such as manufacturing, mining, real estate and
other business services. Furthermore, in wholesale and retail trade industries it was
no different. Manufacturing output declined 6.8 percent more in the first quarter of 2009
than it did in the previous quarter of 2008. Additionally, comparing the last quarter of
2008 and the initial quarter of 2009, production from mining decreased by almost
12.8%(Rena & Msoni, 2015).
On the other hand, the economy of South Africa during Covid-19 suffered severely.
This is mainly because it affected all the sectors that contribute to economic growth as
a whole. Needless to say, the punch in the gut was severe, GDP contracted in much
belief that the second quarter of 2020 would be remembered as the pandemic quarter.
South Africa’s economy suffered a catastrophic decline during April, May and June,
this was when the lockdown restrictions were implemented in response to curb the
Covid-19 widespread. That said, the gross domestic product saw a significant decline
of 16% between the first two quarters of 2020, making the projected annualised growth
of -51%. The fall was so large that it was greater than the annualised contraction of
6.1% projected during the course of the global financial crisis in the first quarter of
2009. Furthermore, the historical data from South African Reserve Bank project that
the GDP registered largest fall in the second quarter of 2020 since 1982. The country
received almost R654 billion in revenue in the second quarter of 2020 (not annually)
at constant 2010 prices. This was the lowest level of production, with the first quarter
of 2009 projecting R649 billion in economic growth (Steyler & Powell, 2010).
Among other things, the manufacturing industry output projected a decrease of 74.9%.
The drastically decrease in the output of the manufacturing industry was mostly
attributed to work stoppages accompanied by low demand for steel, consequently
factories for metals and machinery were badly affected. One of the restrictions of
lockdown in South Africa was the halt of international travelling, inbound and outbound
travelling contributed mostly to the decrease in the economic activity in the industry of
communication and transport. That said, this was followed by the less activities in rail
and road freight operators because of the impediments imposed by the government
on the production and movement of certain goods. Furthermore, the ban on alcohol
consumption and tourist accommodation facilities also severely affected the trade
industry. Finance and personal service sectors were also severely affected during the
pandemic. The finance sector and subdivisions of it fell by a staggering 28.9%. The
personal services industry really took a knock as it projected its negative growth in the
first quarter since 2009. Fitness centers and hairdressers halted their operations and
hospitals only stopped elective of operations. The industry suffered from the
postponement of sporting and leisure activities. Agriculture was the one sector,
however, that appeared to be mostly unharmed. The industry expanded by 15,1%
thanks to a rise in maize exports as well as increased global demand for citrus fruits
and pecan nuts (Gabriel, et al., 2020).
High unemployment rate
The 2007-2008 global crisis had one of the most significant increases in
unemployment. Plenty of businesses reported bankruptcies in 2008 and consequently
jobs were lost. In the third quarter of 2009, around 484 000 people lost their jobs, with
the manufacturing industry being the most contributing towards this as it is a labourintensive industry. This increased the official unemployment rate to 24% and resulted
in about a million job losses at the end of the third quarter. This, together with over 1.6
million displaced workers, increased the real unemployment rate to around 32%. Apart
from the recession’s unswerving effect on unemployment and livelihoods, the external
costs attached with massive unemployment on youth are immeasurable. South Africa
has a trait of high crime rate, this was no difference during the global crisis since an
estimation of 75% of unemployed people are below the age of 35. The number of
protests in 2008/2009 was the largest on record, indicating that the economic
consequences of a decline are also fueling societal dissatisfaction and instability.
Prolonged and exceptionally high rates of unemployment and income inequality have
contributed to tensions within the ruling party alliance over macroeconomic policies
(Steyler & Powell, 2010).
South Africa was characterised by a low employment rate and a decade of slow growth
of job creation prior to the COVID-19 epidemic, which was significantly below the
average for most upper middle-income nations. Despite the government's effective
response to the pandemic and interventions, it finds that job losses have been
significant, and that recovery is proceeding slowly. The overall number of people
working had decreased by about a million and a half by the end of 2020,
notwithstanding the first two quarters of employment growth, and the incomes of
employees who still had jobs had decreased by 10% to 15%. Furthermore, only 40%
of lost jobs had been recovered. Furthermore, the pandemic exposed structural
weakness in the labour market. Youth face a severe unemployment rate which is twice
as much as that of older age groups. When looking at the age group of 15-24, there is
an appalling 63% of the group that is unemployed but actively looking for a job. On the
other side, the age group of 25–34-year-olds, 41% of that group is unemployed. When
discouraged workers are considered, unemployment rates for those aged 15 to 24 can
reach 74% and for those aged 25 to 34, 51% (Gabriel, et al., 2020).
Increase in Commodity Prices and Social Assistance
The increase in the commodity prices during the financial global crisis, the inflation
was forced to increase above the SARB inflation target policy (i.e. 3-6%) to
approximately 9.9% in 2008. As more people transition from formal work to
dependence on state-provided benefits, stagnant job growth, rising unemployment
rates, and greater consumer inflation as a result of the recession have also resulted in
a rise in public spending on the social wage. With over 14 million individuals reliant on
direct income support, social assistance accounted for 3.5% of GDP in 2009, and
between 2006 and 2009, it increased by an average of 12%. The social assistance
during the period of the global crises, in particular 2009 was about 3.5% of the GDP,
therefore this stated that about 14 million people dependent on social assistance by
the government, thus an increase in the average assistance of 12% during the course
of 2006 and 2009. A serious labor market distortion resulted from the combination of
high and rising social wages and widespread unemployment in South Africa, where
there are currently more grant recipients (13.8 million) than working taxpayers (12.8
million) (Rena & Msoni, 2015).
During COVID-19 the pandemic, the increase commodity prices, and social assistance
was no difference. To try to curb the poverty during the pandemic the government
introduced a relief grant of R350 a month for unemployed people. Furthermore, all the
types of grants increased to counteract the problem of poverty. Poverty in 2020
registered an increase in crime, as most businesses were closed the inhabitants
started breaking in and looting in retailers. This act took place in Johannesburg and
Durban. Even though COVID-19 was severe on the standard of living of the people it
provided entrepreneurial opportunity. In particular, in the health industry, there was a
need to build more hospitals to accommodate the increasing number of patients.
Among other things, people took the opportunity to sell masks as this was high in
demand (Gabriel, et al., 2020).
Recommendations
The recommendations or policies that were brough forward to curb the catastrophic
outcome caused by the global financial crisis increase the disposable income of lowincome earners which will lead to a rise in economic demand through huge support
and protection by the Black Economic Empowerment (BEE). Another way, is the
increment in the mobility of knowledge and information about the geographical
demographics of the poor, accompanied with their needs and wants, skills and how
they can participate in productive ventures (Rena & Msoni, 2015). The
recommendations that were brought forward for COVID-19 was, among other things,
the Increase the disposable income of low-income earners which will lead to a rise in
economic demand through huge support and protection by the Black Economic
Empowerment (BEE). Another way, is the increment in the mobility of knowledge and
information about the geographical demographics of the poor, accompanied with their
needs and wants, skills and how they can participate in productive ventures (Gabriel,
et al., 2020).
Conclusion
According to empirical studies that have investigated the two crises, COVID-19 had
the most catastrophic impact on the already vulnerable economy. COVID-19 impacted
all the sectors of South African economy that lead to the contraction of economic
activities. However, though the restrictions were to eradicate the spread of the virus
really took a knock in South Africa’s economy. Furthermore, on the flip side – the
COVID-19 pandemic had some positive impacts on health industry as it increased the
demand for the construction of health facilities. Entrepreneurial opportunities were
created, people sold masks as they were in demand, also the fumigation had demand
which created job opportunities.
References
Gabriel, S., Harris, L., Makrelov, K., Modise, B., Robinson, S., Simbanegayu, W., . . .
Anderson, L. (2020). Impact of Covid-19 on the South African economy.
Southern Africa –Towards Inclusive EconomicDevelopment (SA-TIED).
available onlinle.
Musyoka, J. (2020, September). Comparing the economic impact of 2008 global
recession and Covid-19on South Africa and finding new pathways for
recovery. Retrieved from Democracy Development Program:
https://ddp.org.za/blog/2020/09/16/comparing-the-economic-impact-of-the2008-global-recession-and-covid-19-on-south-africa-and-finding-newpathways-for-recovery/
Rena, R., & Msoni, M. (2015). Global Financial Crises and its Impact on the South
African Economy: A Further Update. Journal Economics, 5(1), 17-25.
Steyler, N., & Powell, D. (2010). The impact of the global financial crisis on
decentralized government in South Africa. doi:10.3917/eufor.358.0149