How will South Africa respond to slower world growth?
Its official – the world is in deep recession – with the first signs of global recovery only pencilled in for early 2010. The big question is what this economic contraction means for South Africa. FAnews Online attended an Old Mutual Investment Group SA (OMIGSA) quarterly press conference titled “Investing in a slow growth world” to find out.
OMIGSA chief economist Rian le Roux wasted no time in painting a gloomy economic picture. He said that the major ‘transmission’ mechanisms – measures of how quickly and severely global trends filtered through to the domestic economy – confirmed the worst. Commodity prices are in steep decline in line with the leading economic indicators of the country’s main trading partners; export volume growth is lower in line with falling world GDP growth; and South African car exports are tumbling too. But we’re in good shape compared to the developed world!
Global meltdown far worse than imagined
Economic data from the US, UK and Japan are “the kind of numbers that we’ve never seen before,” says Le Roux. According to him the “shocking” global statistics point to a “deep and broad-based recession across all sectors and economies.” And economists have been tripped up by the magnitude of the problem, making “classic forecasting errors.” Le Roux notes that although trends were correctly identified, the extent of the downturn was severely underestimated in most cases.
Everyone predicted a slowdown in US retail sales; but no-one expected a slump of 10% from the peak. This is a huge nominal fall and the only significant blip since the statistic was first recorded in 1992. Things in Japan are equally dismal. An accurate proxy for the strength of the region’s economy is the Japanese machinery orders index which shows a massive slide in orders, from around 1 200trn yen a couple of years ago to only 800trn yen today. A quick look at exports and imports for China and the United States is equally revealing. Exports are softer while imports have fallen off a cliff! It’s these imports that keep the rest of the world turning over!
The result is that the developed world is at war with an economic enemy that South Africa has never faced. Economists call it “the great race to zero.” As inflation rates fall everyone’s attention is on the prospect of deflation. There’s a real possibility that the Japanese economy will be in negative inflation territory for the next decade – while the US is certainly going to flirt with zero inflation. And in the absence of inflation you cannot expect economies to prosper.
No interest rate shock to come
There are snippets of good news among the doom and gloom. For one, South Africa’s disciplined monetary policy approach appears to have averted the need for an interest rate ‘crunch’ this year. Domestic lending rates usually increase during downward cycles in the global economy; but this time the Reserve Bank acted early. Instead of hiking rates the Reserve Bank is in a position to use interest rate cuts to bolster the economy through the coming low points!
That said the outlook for South Africa is softer in line with global developments. While there are some factors which isolate the domestic economy from the rest of the world – for example the rosier conditions at domestic banks – there is “no escaping the global downturn.” Other good news stories include the infrastructure drive that will lend support to the economy and expected lower inflation. And Le Roux notes that “real incomes will get a boost” as wage increases outstrip inflation later this year. Lower interest rates, lower petrol prices and softer inflation should provide relief in the second half.
But “the rand is vulnerable to further trouble abroad,” says Le Roux. And the motor, residential construction, mining and export sectors are in deep recession at the moment, which means we can expect a tough first half.
South Africa – plenty of bullets to dodge
Le Roux identified five risks that we’re going to have to avoid in coming months. The first is the possibility of a severe export slump. There are already signs of a slight contraction in exports; but provided the slowdown remains gradual the shock to the domestic economy won’t be too bad. The second risk is that private investment, which has been on the rise in recent years, declines. Some private investment underpin will be needed to reach the 1.5% GDP growth number for the year.
Risk number three is job shedding. The economy will lose jobs under current conditions; but cannot afford to shed too many. Le Roux says the possibility of a rand slump cannot be ignored either. If this happens a whole range of inflationary pressures return. And finally there’s a real risk that South Africa makes policy errors, such as the Reserve Bank delaying interest rate cuts for too long – or cutting too aggressively early on.
Editor’s thoughts:
The press is full of stories of recession, slower growth and looming job cuts. And we’re already seeing early signs of slower GDP growth on the domestic economy. Have you noticed a slowdown in you business in the last six to 12-months? Add your comments below, or send them to [email protected]
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