South Africa’s downward spiral since 1990

Economist Mike Schüssler has published a graph of South Africa’s gross domestic product (GDP) per capita which paints a pitiful picture of the country’s financial situation.

In 1990, South Africa’s GDP per capita was 107% that of the world average. Fast-forward thirty years and this figure has dropped to 74%.

In simple terms, it means that South Africans are getting poorer when compared to their global counterparts.

To turn the situation around will require drastic action from the government, Schüssler said.

“To get back to the world average South Africa would have to improve its GDP with 35.1%. To do so over a decade the country would have to grow its economy by 55.5% taking population growth into account,” he said.

This level of growth was last seen in 1974, which means it is unlikely to happen.

Schüssler said unless the government stops fighting with business and cuts public spending, we may not get back to the 1990 level in our lifetime.

“If South Africa does not fix things like electricity, water, roads, and railways, the downward trend will continue,” he said.

The chart below shows South Africa’s gross domestic product (GDP) per capita compared to the world average.

Big GDP decline because of COVID-19 lockdown

Schüssler’s data only tracks GDP per capita until 2019, and South Africa’s relative position is likely to deteriorate further because of the big economic decline this year.

South Africa’s gross domestic product (GDP) dropped by 51% in the second quarter of the year, reflecting the immense damage done to the economy by the COVID-19 lockdown.

This pushes South Africa deeper into recession after GDP growth for 1Q20 was recorded at -2%, following drops of 0.6% in 3Q19, and 1.4% in 4Q19.

It was the fourth consecutive decline in quarterly GDP since the second quarter of 2019, Stats SA said.

Finance minister Tito Mboweni said South Africa’s second-quarter contraction in GDP was larger than expected by both the National Treasury and the Reserve Bank.

This, he said, raised the risk that the GDP outcome for 2020 could be worse than previously thought.

Mboweni said the coronavirus pandemic has left government finances ‘dangerously overstretched’ while heightened debt threatens the country’s future economic prospects.

The minister said the economy is likely to contract by more than the 7% previously forecast by the Treasury.

The Organisation for Economic Co-operation and Development (OECD), for example, expects South Africa’s economy to shrink 11.5% in 2020.

Tax revenue is also expected to fall by a greater proportion than the contraction in GDP – although this is by design.

“Businesses pay tax only on profits, and as wages fall, effective tax rates on income reduce. The tax system is inherently countercyclical,” he said.

The expected tax shortfall of more than R300 billion, around 6.2% of GDP, means the country will have to borrow more money.

“Failure to contain our ballooning debt and debt service costs, and narrow the budget deficit, will damage the long-term economic prospects,” he said.

Now read: Middle-income South Africans recover after lockdown

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South Africa’s downward spiral since 1990