Four potholes to economic recovery
Every quarter we attend market updates hosted by dozens of South Africa’s top investment managers. Over the past 14 days we’ve listened to analysts and economists from StanLib, Absa Capital, Investec Asset Managers and Sanlam Private Investments to name a
The minister said the local economy would grow by a mere 2.7% this year, recovering to 3.6% and 4.2% in 2013 and 2014 respectively. But even these modest growth rates are under threat. Sanlam Private Investments’ director, Alwyn van der Merwe, identified four potential potholes on the road to domestic economic recovery. He was addressing the media at the group’s Q1 2012 Economic Update titled Navigating the Vastness of Uncertainty. Each of these “potholes” derives from one of our major trading partners… And South Africa can do little more than watch as the leaders in those economies take steps to remedy the problems.
The first pothole – A Greek default
The European sovereign debt crisis has dominated the financial media since late 2010 and continues unabated… While some argue over whether Greece will fold or not, others point out that it has already collapsed. It is only thanks to the imaginative spin doctoring of politicians and central bankers that the default has been engineered without being acknowledged! A quick look at the yields on long-term government bonds in the so-called PIGS (Portugal, Italy, Greece and Spain) confirms that Greece is only the first of many Euro-zone economies with significant problems. It is only a matter of time before the next “domino” in the chain falls...
Europe’s financial woes have brought into question a system that forces countries to implement similar monetary and economic policy regardless of their situation. There is a strong possibility the events of the past two to three years could lead to a break-up of the European Union – or at the very least a rethink of certain macroeconomic practices. It is not all bad news… Van der Merwe is upbeat about the proactive steps taken by new European Central Bank (ECB) president, Mario Draghi. The ECB put in place a €1 trillion lifeline to the region’s banks recently. But despite this unprecedented liquidity uncertainty remains. While we can debate a Euro-zone meltdown, recession is a given. And that’s bad news for South Africa, because Europe remains our second largest trading partner.
The second pothole – Middle Eastern instability
With all the talk about US and Euro-zone debt, ongoing tensions in the Middle East are all but forgotten. Van der Merwe said there are major concerns over the political vacuums created in the region in the wake of the “Arab spring” uprising. Another area of concern is the influence of countries such as Russia, China and Iran in the region – exacerbating the East versus West tensions of old. Why should South Africa care about Middle East instability? You can find the answer to this question at your local petrol station… Trouble in the Middle East reflects in higher Brent Crude prices, which in turn hit the pockets of motorists worldwide. Local motorists are already docking up almost R11/litre for petrol – and with oil hovering near $130/barrel they will soon be paying more!
The third pothole – Debt and elections in the US
Although China is growing in leaps and bounds, the US remains the major economic hub of the world (for now). This region is struggling with a mountain of debt, totalling 100% of GDP and growing. The US debt problem is a legacy of two separate presidencies. First Republican George W Bush (2001 to 2009) cut taxes too aggressively… And then Democrat Barack Obama (2009 till present) increased benefits without reining in other expenditures. The net effect is that the average US household now receives more in benefit than they pay in taxes, with the difference funded from new debt! “There are some signs that the US is bottoming out,” said Van der Merwe. “But we expect plenty of political and economic rhetoric [through 2012] due to it being an election year…”
The fourth pothole – A “hard landing” in China
The monster among the economic potholes is a “hard landing” in China… Economists define a hard landing for the emerging market superpower as GDP growth slumping to between 4% and 6%. A “soft” landing – currently the consensus view – is for growth to fall to only 7.5%. It is difficult to imagine the “hard landing” scenario playing out, because China has posted GDP growth in excess of 9% for more than a decade already… But if China stutters South Africa will feel the pain. First, because our commodity-rich economy is underpinned by higher commodity prices, largely thanks to Chinese demand. And second, because China is our main trading partner. Trade with the region surged 77% in 2011 alone!
There is little South Africa can do to address the four potholes identified in today’s newsletter. The best policy will be to get our house in order and ensure that once the global economic outlook improves, our economy is ready to fire on all cylinders.
Editor’s thoughts: Every now and then there are calls to create an African trading block similar to the European Union. It would be difficult to create such a region given the huge differences in GDP between South Africa and our immediate neighbours. And, based on recent evidence, countries benefit from being able to set their own economic policy. Do you think the European Union will emerge from the current financial crisis unscathed? Add your comment below, or send it to [email protected]
