“Jacques Nel is the Head of Africa Macro at NKC African Economics. He shares with instore the cot of a lockdown and how the FMCG Industry can navigate it’s way through the pandemic through creation of actionable and innovative strategies.”
Lockdowns have become critical in the fight to contain Covid-19. But they come at a severe economic cost. Not only are certain types of consumer spending prohibited, but border closures and the lingering psychological impact of a lockdown weigh on economic activity beyond the lockdown period. Our estimates suggest a two-week lockdown extension results in an average three ppts reduction in annual consumer spending that year. This figure increases to just under nine ppts if the lockdown is extended by five weeks.
International experience demonstrates that a two-week lockdown is much too short to be effective, particularly given compliance issues prevalent across the African continent. We have seen a few lockdown extensions on the continent already and are likely to see many more. In estimating the impact of a lockdown on consumer spending we account for the structure of an economy (agrarian vs services-based), urbanisation, the available monetary stimulus, the likely fiscal stimulus, and the economic importance of both tourism and remittances.
The recently announced two-week extension of the South African lockdown is expected to cut overall consumer spending by $7.5bn in 2020. This translates into a reduction in per capita consumption of around $125 this year, directly attributable to the two-week extension. When incorporating the five-week lockdown, we forecast consumer spending at $186bn this year, reflecting a 7.1% reduction from 2019.
Minimising social costs is the top priority, but the economic costs related to lockdowns cannot be ignored. The collapse of financial support structures could push an already impoverished society into destitution. Lockdowns are necessary, but the economic costs highlight the importance of making them as effective and as short as possible.
The decision to extend a lockdown is an economically costly one. Extending South Africa’s five-week lockdown by another five weeks would result in per capita consumer spending dropping by just over $310 in 2020 relative to a no extension scenario.
Put differently, per capita consumer spending is expected to drop by an additional 10% if the lockdown is extended by five weeks.
Figure 1: Change in per capita consumption following potential lockdown extensions (relative to announced lockdown period)
Lockdowns the first step in combating Covid-19
Around a third of the world population and most of the global economy is in some form of lockdown. Border closures and regional or national lockdowns are considered critical in arresting the spread of Covid-19. The vigour with which governments have adopted lockdown measures varies considerably across the continent. The length of lockdowns also varies, while the timing and effectiveness of these measures will have an impact on the eventual duration of a lockdown – less stringent lockdowns and delays in implementation may result in the need to extend restrictions. These restrictions also come at a significant economic cost. Numerous sectors of the economy are effectively shut down, resulting in a supply-side contraction, while restrictions on movement and certain types of spending weigh on demand.
Our modelling compares private sector consumer spending under the scenario where government-declared lockdown periods materialise to those where the lockdown periods are extended by two weeks, and another where the lockdown is extended by five weeks. Consequently, the officially declared lockdown period should be considered when analysing the data, as these figures attempt to assign a cost to the actual extension beyond the announced period. Research by Oxford Economics finds that, for economies that began lockdowns in mid-March, an indicative range for when the lockdowns might end, based on the experience of China, would be mid-April to end-May. This suggests we are likely to see lockdown extensions in countries that have announced lockdowns under four weeks, especially those that have not been proactive in their lockdown decisions.
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