The global consensus is that the world's economy will be firmly on the path to recovery by end-2009, allowing SA to regain its growth momentum and move out of recession in the first half of 2010.

If this is the case, then SA is already halfway through the downward phase of the current business cycle. But what if the green shoots of recovery wither on the vine and the global recession lasts until the end of 2010? This would imply a high probability of a three-year recession in SA, according to Cadiz Securities economist Kim Silberman.

Silberman has modelled various scenarios and the related job-loss implications for South Africa. Her findings are sobering, with her worst-case scenario predicting about 820 000 job losses between 2008 and 2013, or 12 percent of the workforce.

In South Africa, the average business cycle covers about four years, of which just under two years are spent in the downward phase (when growth is contracting and below trend, though not necessarily negative or in recession).

A meaningful recovery

"Considering the extreme length of the preceding expansion (103 months), alongside the global financial restructuring which needs to occur before a meaningful recovery can begin, we believe that the current downward phase may last longer than average," says Silberman. "A recovery is also likely to be depressed by tighter credit standards and a lack of creditworthy borrowers as unemployment rises."

Cadiz warns that the SA economy could easily remain in a downward phase for another two years, assuming the green shoots wither and the global recession lasts until the end of 2010.

Though this scenario creates scope for an additional 50 basis-point interest rate cut this year, the implications for employment are dire. The rate of job-shedding in this recession is unprecedented. According to the latest Quarterly Employment Survey by Statistics SA, private-sector formal employment fell 2.7 percent (179 800 jobs) between the first quarter of 2009 and the peak in employment in the third quarter of last year.

A further 5.5% drop in employment

Cadiz's base case (which assumes a three-year recession in SA) is that there will be a further 5.5 percent drop in employment over the next four years, taking the total number of job losses to more than 500 000 or eight percent of the workforce from the 2008 peak to the end of 2013.

However, if the global recovery begins this year, job losses will not be as severe, with private-sector employment falling by 359 900 (or 5.4 percent) from the 2008 peak to the end of 2012.

Silberman warns of a self-reinforcing downward spiral where lower tax revenues result in less fiscal stimulus, lower domestic demand, increased government spending on social welfare, decreased savings levels, an increase in government debt issuance and the cost of borrowing, and, ultimately, slower GDP growth. This reinforces the decline in employment.

"Usually, deflationary scenarios lead to lower real wage rates, sowing the seeds of a recovery," she says. "However, with labour unions securing double-digit wage increases, some of which may be in place for the next one to two years, this feedback mechanism may not be triggered."

Higher wage rates alongside rising energy prices imply sticky inflation, which will further restrict consumer spending because this implies lower real wages and lower disposable income.

Under these conditions, any recovery is likely to be delayed and, when it does arrive, very weak compared with past upswings.

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