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A slumbering private sector holds the key to economic growth

27 June 2012 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

“Europe is back in recession – negatively impacting the world economy!” This one-liner set the theme for Stanlib’s 25 June 2012 economic update, presented by economist Kevin Lings at the group’s Melrose Arch offices. He painted a “doom and gloom” scenario

The country’s retail sails index has slumped from around 115 points at the beginning of the 2008 recession to just 80 points today as consumers battle to make ends meet. Unemployment tops 22% and both public sector wages and state benefits have been slashed. To make matters worse there is no “feel good” wealth effect to lift consumers’ spirits: the Greek stock market has lost 90% of its value over the past four years while house prices have hit the skids. Among the alarming statistics presented was the decimation of deposits held at Greek banks, down from approximately €230 billion in 2010 to just €165 billion in February this year. (Officials have since stopped publishing the number).

From recession to depression

An economy enters technical recession when it reports two consecutive quarters of negative GDP growth. Greece – with a 15% decline in GDP since 2008 – has slipped beyond recession into full blown depression. The bad news, said Lings, is that every avenue of growth is blocked. Government remains massively indebted (debt to GDP tops 150% post-bailout), the consumer cannot raise additional credit, the private sector is working at limited capacity and exports are plummeting. Even the drastic solution – an exit from the Euro currency – is a double-edged sword. A decision by Greece to revert to its Drachma would trigger an immediate spike in inflation… It would also lead to speculation as to which Euro-zone economy would be next to dump the Euro, sending the region deeper into recession.

As Greece limps towards some form of economic stability the likes of Spain and Italy are showing renewed weakness. “Spain is the result of a banking problem rather than a government debt problem,” said Lings. “Its banks are taking strain due to an imploding property bubble.” He mentioned that the country’s banks were looking for up to €100 billion in bailout funding as their non-performing loans neared 10%... (A non-performing loans number of 1% would set the alarm bells ringing among South African banks). The yield on 10-year government bonds in both Italy and Spain are already at 6.5%, an unsustainable level for either economy. Lings believes the challenges in these economies are virtually beyond the means of economists to resolve – solutions lie in the political realm – and Germany will have to step in to help.

Lessons for South Africa

South Africa can learn a number of lessons from the Euro-zone debt crisis. Principle among these is what happens when government expenditure as a percentage of GDP becomes unmanageable. Average government expenditure in the affected Euro-zone countries tops 50% versus 30% in South Africa, 25% in BRIC economies and just 17% in Singapore. “Simply put – Europe cannot afford its government any more,” observed Lings. There is no better argument against uncontrolled public sector expansion.

The good news is that South Africa’s post-recession economic vitals emulate those exhibited by the United States rather than Europe. Like the US our GDP has climbed back above pre-recession levels, while our post-recession employment level falls slightly short of the pre-crisis peak. On the negative side, South Africa has slipped back into a perpetual trade deficit… Lings said there was cause for concern because the deficit stemmed from falling exports rather than rising imports.

At the peak of the 2008/9 crisis the so-called emerging Asian economies propped up South African exports. The slump in European demand for our goods was made up for by demand from China, India, Indonesia and Malaysia, among others. As things stand today, both European and Asian demand for our goods is tapering off. There is also evidence that consumer income has turned the corner domestically, with the result consumers will not be able to support domestic GDP growth going forward. The latest mortgage statistics suggest there will be no help from the household and construction sectors either.

Policy clarity is critical

Where will South Africa’s future GDP growth come from? Lings said that the solution to all of our woes is to create jobs. To create more jobs, Lings favoured the sentiment of economist Milton Keynes, who said: The level of employment is determined by the level of investment. “We have to get South Africa’s fixed investment as percentage of GDP back to 25%, and keep it there for a decade, to make a meaningful dent in unemployment,” concluded Lings. He hopes that Transnet’s R300 billion capital expenditure plans (spread over the next seven years) will prove the catalyst for the private sector to invest some of the R550 billion currently sitting in cash on corporate balance sheets... Policy clarity from the ruling party will be essential in waking the private sector from its slumber!

Editor’s thoughts: Although South African corporations have more than R550 billion in cash on their balance sheets they remain reluctant to commit this cash to capital intensive projects. One of the main reasons for their dithering is uncertainty over government policy on nationalisation and – of even greater concern – expropriation. Should private sector firms go ahead with long-term capital investments in the absence of policy clarity? Add your comment below, or send it to

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