An economic depression is an occurrence wherein an economy is in a state of financial turmoil, often the result of a period of negative activity based on the country’s gross domestic product (GDP) rate.
It is a lot worse than a recession, with GDP falling significantly, and usually lasts for many years. In the US, the Great Depression lasted for a decade, with the unemployment rate reaching 25% and wages falling by 42%. What can we say about Namibia? Is Covid-19 to be blamed for all this, or the just-ended drought that saw many farmers losing their livestock and crops?
There are several factors that cause an economic depression, especially to a country like Namibia. An economic depression is primarily caused by worsening consumer confidence that leads to a decrease in demand, eventually resulting in companies going out of business. We have over the last 24 months experienced major and prominent outlets closing in shopping centres across the country (Jet, Edgars, etc). When consumers stop buying products and paying for services, companies need to make budget cuts, including employing fewer workers.
But let us look more deeply into other factors that lead to an economic depression.
Stock market crash
The stock market is composed of stocks that investors own in public companies. Changes in shareholdings can be a reflection of how an economy is doing. When the stock market crashes, it can be an indication of investors’ declining confidence in the economy. In recent years, we have seen public companies going insolvent for many different economic reasons. Air Namibia, Scorpion Zink Mine and the SME Bank are among the prominent Namibian businesses that went bankrupt and into liquidation. Companies such as the Swakopmund Station Hotel and Casino are among companies that can result in a stock crash if they end up closing.
Decrease in manufacturing orders
A business flourishes on the demand for its products and services. When manufacturing orders reflect a decline, especially for an extended period of time, it can lead to a recession, and worse to an economic depression. The Peugeot car assembly, cement, beer, fish and meat are amongst our main products currently in Namibia. However, are we meeting the demands for the world economy, and are the prices affordable to the local market? If all stakeholders come together, including the private sector, local authorities or central government to address economic issues without individual interests, we will experience a positive path towards economic reforms in Namibia.
Control of prices and wages
Wages are a sensitive topic in the Namibian economy. We have witnessed high-profile strikes by Shoprite and NBC employees for increases recently as prices of commodities constantly increase and wages remain stagnant. Also, when the government controls wages and companies are not allowed to lower them, businesses may be forced to lay off employees to survive.
Oil price hikes
Oil price hikes can cause a ripple effect on almost everything in the market, which is common knowledge. When it happens, consumers lose their purchasing power, which can lead to a decline in demand. With oil having possibly been discovered in the Kavango regions, we are bound to experience a shift in our economic activities, both positive and negative. The question remains, is the Namibian government and economy ready for this kind of boom or pressure? When consumers are no longer confident in the economy, they will alter their spending habits, and eventually reduce the demand for goods and services.
Signs of an upcoming economic depression
A worsening unemployment rate is usually a common sign of an impending economic depression. With high jobless numbers, consumers will lose their purchasing power, and eventually lead to lower demand.
Inflation can be a good sign that demand is higher due to wage growth and a sturdy workforce. However, too much inflation will discourage people from spending, and it can result in a lowered demand for products and services.
Declining property sales
In an ideal economic situation, consumer spending is usually high, including the sale of homes. But when there is an impending economic depression, the sale of homes goes down, signalling falling confidence in the economy.
Increasing credit card debt defaults
When credit card usage is high, it is usually a sign that people are spending, which is good for the GDP. However, when debt defaults rise, it could mean that people are losing their ability to pay, which signals an economic depression.
Ways to prevent another economic depression
An expansionary monetary policy involves cutting interest rates to encourage investment and borrowing. When interest rates are lower, consumers will enjoy more value for their money, and will be encouraged to spend more.
An expansionary fiscal policy means increasing government spending, reducing taxes, or a combination of both. Tax reduction gives consumers disposable income, which, in turn, encourages spending, especially in this tough era.
Financial stability involves the government guaranteeing bank deposits, which promotes the credibility of banks, and gives maximum support to businesses and entrepreneurs in the country.
However, there is always the chance for it to occur again if not all sectors of the economy work together to prevent it. At the current status, we need to create a positive business environment more than ever to attract investment in Namibia, specifically in the capital projects’ and manufacturing sectors.
Caption: Jeremia Nghiwanwa (Photo: Contributed)