Have we reached the bottom of the economic cycle?
Many people have been wondering when we will reach the bottom of the current economic downturn, and are nervously looking forward to the proverbial light at the end of the tunnel. The answer to this question depends on how prepared we are to manage and contain new infection rates and on the effectiveness of the government's fiscal and policy response to the economic fallout caused by the pandemic when it hit our shores in March.
Worldwide, there is a shift towards a more balanced approach to dealing with the pandemic with governments trying their best to minimise the loss of lives while allowing their economies to operate with as little restrictions as possible.
Back home, there are indications that the worst is now behind us and that the second quarter of 2020 was the turning point, both in terms of economic contraction as well as the spread of the coronavirus. Although current confirmed cases point to a flattening curve, the risk of a return to stricter lockdown due to further waves as is being witnessed in other parts of the world such as Britain still lurks in the shadows. If that were to happen here and policymakers make the wrong decisions, the shadow of Covid-19 may be with us for a very long time.
As reported by the Namibia Statistics Agency (NSA), our gross domestic product (GDP) contracted by a record 11.1% year-on-year in the last quarter compared to a revised 1.8% contraction in the first quarter. The destruction was mainly visible in the tourism sector and its associated transport sector which fell by a disturbing 64% and 30%, respectively followed by the retail sector, which decreased in value by 23%.
Overall, the domestic economy is expected to contract by 7.8% in 2020, according to Bank of Namibia estimates. The global economy will not fare any better as it is expected to record a deeper recession in 2020 than previously projected, but then to recover in 2021. The IMF World Economic Outlook for June 2020 projects global real output to contract by 4.9% in 2020, its worst recession since the Great Depression, and more severe than during the 2008/2009 global financial crises.
Global growth for 2021 is expected to come in at around 5%. This growth will to a large extent depend on whether policymakers will allow markets to operate freely. We also expect the local economy to turn the corner, but remains mindful of the impact of the policy uncertainty currently prevailing. Despite the uncertainty, we are optimistic that growth will be in the range 1.5% to 4.5%.
To summarise, the worst is behind us in Namibia, although downside risks remain such as further waves of infection, possible reintroduction of lockdown measures, and slow progress in the development and production of a vaccine. We also believe that the full socio-economic impact of the lockdown is still to be felt after thousands of people lost their jobs. Governments around the world have incurred substantial debt burdens, and consumer and investor confidence is extremely low. Liquidity may dry up as banks' appetite and ability to finance reduce. We urge our clients to diversify their portfolios, maintain a healthy foreign exposure and ensure for enough liquidity in their portfolios.
