1. HRSTA82 Statistics Honours Research Project
Answer:
Effects Of Pandemics
Various factors have been hypothesized to influence the performance of an economy. Such
factors include availability of natural resources, labor, capital i.e., physical and human
capital, technology, high investment rates, and entrepreneurship (Upreti, 2015). According
to (Wijaya, 2017), high Economic Growth as well as the underlying country’s sustainability,
make up the main conditions of sustainability economic country development. Factors such
as large-scale pandemics have been studied in relation to among other effects, their role in
the disruption of economies through ripple effects occurring as a result of the shocks of
“…simultaneous disruptions to both supply and demand in an interconnected world
economy” (Chudik, et al., 2020).
Economic Growth
A country’s gross domestic product (GDP) has been proposed by various studies as an
indicator of economic growth
The ongoing Corona virus pandemic is arguably one of the most widespread pandemics of
modern times which according to various studies while marring the global economy with
the deepest recession since the end of World War II (Yeyati & Filippini, 2021), has had its
silver linings such as a boost to productivity growth (Carlsson-Szlezak & Swartz, 2021).
Mixed feelings.
Statement Of Problem
Since the onset of the Coronavirus pandemic in late 2019, the world has had to deal with
issues such as big shifts in the stock markets (Jones, et al., 2021), an increase in
unemployment rates (Falk, et al., 2021), an increase in the demand of food due to
stockpiling (Nicola, et al., 2020), imposition of travel restriction that have affected
industries such as tourism and international transport (World Tourism Organization,
2020), increase in productivity (Carlsson-Szlezak & Swartz, 2021).
2. Previous studies on the dynamics of COVID-19 have examine the effect of the virus from
various fronts including Unemployment (Klein & Smith, 2021), Health, Social and Political
(Yunfeng, et al., 2021). Ideally, the effects of the Corona Virus pandemic on the growth of
various economies around the globe are apparent but to what extent does it affect an
individual? The current study is centered around examining the effect of the coronavirus in
South Africa. In particular, the current study seeks to examine how the pandemic affects
economic growth if it does.
Objective
The current work proposes the examination of the change of the Producer Price Index in
South Africa before and after the Corona Virus epidemic. To my knowledge, there exists
limited research focusing on the effects of Covid-19 on the Producer Price Index. Therefore,
this study will examine the behavior of PPI before and during Covid-19 to establish whether
Covid-19 which is considered a modern-day pandemic affected the PPI of South Africa.
Based on the findings, we will use an ARIMA model to predict whether the country’s PPI will
show an upward or downward trend.
Research Questions
To address the research objective, the following questions will be answered regarding the
behavior of the South African PPI:
How does the PPI of South Africa compare before and after the onset of the global
coronavirus pandemic?
What is expected of the price changes in South Africa over time?
South African Economy
South Africa is considered one of the fastest-growing economies in Africa an observation
attributed to the country’s mutual interaction openness with the rest of the world (Joshua,
et al., 2020). Based on the 2021 economic index, the country was ranked the 99th freest
economy is an increase of 0.9 points, which is attributed to the improvement of the judicial
effectiveness (The Heritage Foundation, 2021). However, according to a report by the
(World Bank, 2021), the coronavirus pandemic has had a significant effect on South Africa’s
economy. The World Bank estimates that the economy contracted by approximately 7% as
of 2020 given that the pandemic affected both external and internal activities following the
containment measures adopted by the government.
(Upreti, 2015) argues that high volume exports, significant supply of natural resources,
longer life expectancy, as well as high levels of investment tend to have a positive effect on
the performance of developing economies implying that a disruption to any of these factors
will adversely affect the underlying economy. (Woodruff, 2019) on the factors affecting the
economic growth of the South African economy supports the observations by (Upreti,
3. 2015). According to (Woodruff, 2019), human resources, investment in physical capital,
quantity and availability of natural resources, advancement in technology, as well as
commodity prices (Stoddard, 2021) are among the important factors that shape the growth
of South Africa’s economy.
In practice, the extensive contraction of the South African economy in 2019 is observed to
have led to an increase in the number of individuals living under poverty level by an
estimated 2 million persons i.e., “…living below the poverty line for upper-middle income
countries, $5.5 per day in 2011 Purchasing Power Parity exchange rates, PPP” (World Bank,
2021).
South Africa Before The Pandemic
The country entered the years following the pandemic after several years of relatively low
growth. For instance, in 2019, the economy expanded by 0.2%, 0.8% in 2018 which was
partially caused by the reappearance of load shedding linked with operational and financial
strains at the energy utility Eskom (World Bank, 2021). Just before the pandemic, the levels
of unemployment in South Africa were approximately 31.3% while that among men was
27.2% in Quarter 4 of 2019 (Statistics South Africa, 2019).
The percentage of the population living below the upper-middle-income-country poverty
line dropped from approximately 68% to about 56% between 2005 and 2010 (World Bank,
2021). However, the proportion of the population living in poverty since shown an upward
trend reaching 57% in 2015 with forecasts showing that it is expected to peak up to 60% in
2020.
The Pandemic
In essence, in the years following 2020, the Coronavirus disease 2019 (COVID-19) pandemic
has been associated with catastrophic health and economic effects globally (Chitiga, et al.,
2021). South Africa reported the first COVID-19 case on the 1st of March
2020 (Chitiga?Mabugu, et al., 2020) and as of January 12th 2020, the country had recorded
up to 3,534,131 cases with approximately 92,649 mortalities (Worldometer, 2022).
Containment Measures
Beginning with specific smaller measures as of March 15, 2020 onwards, the government
put in place a national lockdown from March 27, 2020. The associated lockdown measure
included the complete closure of childcare, institutions of primary and higher education and
all public leisure activities (Schröder, et al., 2021). Other measures include severe physical
distancing conditions, an up to 70% reduction of shopping, 85% of on-site work force as
well as a 90% reduction in other activities.
4. Effect Of The Pandemic On The South African Economy
Emergence of COVID-19 has replaced Eskom’s role as the main risk to the
economy (Stoddard, 2021). (Stoddard, 2021) argues that on its own, Eskom would have to
crumple to lead to a 51% gross domestic product (GDP) drop on its own. Structural hurdles
coupled by weak growth have undermined progress in combating poverty, which have been
amplified by the COVID-19 pandemic (World Bank, 2021). Various studies show that the
imposition of lockdown measures by the government in March 2020 had a negative shock
on the economy (Arndt, et al., 2020; Álvarez-Iglesias, et al., 2021; Posel, et al., 2021) leading
to among other factors, job loss (Álvarez-Iglesias, et al., 2021), widening income inequality
(World Bank, 2021; Chitiga?Mabugu, et al., 2020), etcetera.
Inflation And Economic Growth
(Ndoricimpa, 2017) observes that low inflation has a positive effect on the growth of
middle-income countries with a threshold of 6.5% above which, inflation is harmful to the
economy. According to (Sattarov, 2011), in the long run, there exists a positive relationship
between inflation and economic growth an observation supported by (Ekinci, et al., 2020)
who when studying the relationship between price stability and economic growth notes
that below a specified threshold level (4.182%), inflation-growth relationship is
insignificant while above the threshold, inflation has a negative effect on the economic
growth of a country.
Measuring Inflation Using Indices
Both PPI and CPI are popular measures of inflation where PPI measures inflation from the
perspective of costs to industry or producers of products (Pinkasovitich, 2021). For
investors, inflation is important given that it can be used to predict the future direction of
interest rates. Primarily, interest rates are negatively associated with market
returns (Pinkasovitich, 2021). Conceptually, since the PPI measures changes in prices
before they reach the consumers, it can be considered as an early predictor of inflation
hence useful for addressing the current work’s research objective.
Research Design
An empirical research design was adopted for this work since it is the optimal approach for
the proposed time series data analysis. The design will allow for the exploration of the
behavior of the PPI time series data which will be sampled at various intervals to be studied
before a specified model is applied. As such, the adopted empirical methodology will help
avoid the possibility of generating wrong results and subsequently wrong conclusions.
Besides, the nature of the analytical model to be applied will depend on the actual behavior
of the PPI data instead of a perceived notion.
5. Population And Sample
Population
To measure the volatility of PPI before and after the coronavirus pandemic, information
related to the producer price index of South Africa was collected from the Federal Reserve
Bank of St. Louis data repository which includes PPI for manufactured goods from January
1970 to June 2021. The PPI was computed using 2015 as the base year. Similar information
is contained in South Africa’s government data repository i.e., as well as the OECD
repository which however uses 2020 as the base year but offers a wide range of PPI for
different products.
In particular, the current study sought to examine the changes exhibited by the Producer
price indices in manufacturing which measure the rate of change in prices of commodities
sold as they leave the producer. The data from the Federal Reserve Bank of St. Louis data
repository is more readily usable compared to that from the government's repository and
since the information from the three repositories is similar except for the base year for SA’s
government repository, the information contained is assumed to be accurate enough to be
used for the current research.
Sample
Following the worldwide spread of the novel coronavirus which was first reported outside
China on January 24th, 2020, and in SA on March 5th, 2020 the country adopted serious
restrictions from March 15th (Wiysonge, 2020) and national lockdown from 27th March
2020. As such, the periods of interest i.e., the inclusion criterion for the current study
include the period before March 27th and the period after March 27th. Using this inclusion
criterion, the details of the sampled data are given in table 1 below.
Table 1: Data Samples
Data
Period
Number of observations
6. Population
01/01/1970 to 01/06/2021
618
First Sample (Period before the novel coronavirus was first reported in SA)
01/01/2000 to 26/03/2020
231
The second sample (Period after the first case of covid was reported in SA)
27/03/2020 to 01/06/2021
15
Statistical Tests
Two approaches were adopted for the final analysis including t-test and ARIMA forecasting.
T-Test
We were also interested in determining whether on average, the PPI before the pandemic
7. was significantly different from the observed PPI after the pandemic. To test for this
difference, we proposed the use of an independent samples t-test tested at 0.1 level of
significance.
Null Hypothesis
The means South African PPI for the period before and after lockdown are equal.
Alternative Hypothesis
The means for the two populations are not equal.
ARIMA Forecasting
During our preliminary analysis we had established that the South African PPI was
observed to be stationary after 1st order differencing at 90% confidence interval hence the
time series was differenced and fitted using ARIMA model. To generate a stationary time
series model, we implemented a differencing which is essentially suitable for removing the
time-dependency of the data by stabilizing the mean through removing changes in the level
of a time series (Brownlee, 2017). In our case, we differenced both time-series datasets with
k = 1. Table 1 below provides an overview of the Dickey-Fuller test on the differenced time-
series data.
Table 2: Dickey-Fuller Test On The Differenced Time-Series Data
Period
Dickey-Fuller Statistic
P-value
One
-6.1563
8. 0.01
Two
-3.53
0.05973
At 0.1 level, we observe that after differencing, both time-series data exhibit stationarity
hence suitable for testing for time series modeling. In our case, we will use the data to
forecast the trend of the South African PPI.
Analysis Of Results And Discussion
Descriptive Statistics
Table 3 below provides an overview of the summary statistics of the South African PPI.
Table 3: Summary statistics
Characteristic
N = 246
Date
10. 42 - 135
Period
After Lockdown
15 / 246 (6.0976%)
Before Lockdown
231 / 246 (93.902%)
We note from table 3 above that the mean PPI for the period between 1st January 2001 and
1st June 2021 is (M = 83, SD = 27, N = 246). Moreover, the lowest recorded PPI is 56 while
the highest is 107.
