Panic phase to be followed by a painful economic slowdown

Global markets have been in a panic phase since September 15, intensifying the housing market and consumer-led slowdown that preceded the current financial market turmoil and with cost cutting already starting to come through in the corporate world.

While financial crises are always finite, it is difficult to predict how and when a recovery will come about in the world economy. For now, however, Arthur Kamp (pictured), economist at Sanlam Investment Management predicts that the slowdown will deepen into a world recession – with global growth at or below 2.5 percent next year - and that disinflation, if not deflation, will become the key economic theme next year.

Kamp notes that the US has a systemic and structural problem that it will have to work out of the system over the next few years because US households engaged in a decade of dissaving. “The consumer-led slowdown will intensify even further from here because the wealth effects were so important on the up leg and they are now faced with not only declining house prices but also sharply lower equity markets.”

In another sign that things are likely to get a lot worse before they get better, corporate spending is already slowing down. Kamp says, “There is a notable decline in business spending on equipment in the developed world, and that we can expect to see a lot more contraction in business spending in the US, Italy, Spain and even Germany and France. Project delays will ultimately be followed by rising unemployment.”

All this will translate into much slower global growth, with Kamp forecasting that the developed world could deliver very weak growth next year with emerging markets also recording much slower rates of growth than before the financial crisis. In all, he predicts that global growth will slow to an average 2.5 percent in 2009, which can be considered recession territory with risk seemingly skewed to the downside.

For the world to recover from this recession, Kamp says developed markets will have to go through a painful period of recapitalisation and deleveraging. The US housing market will need to stabilize, with delinquencies peaking and housing inventory levels declining. And international credit markets will need to return to normalcy.

He envisages a prolonged period of adjustment in the global household savings rate led by developed economies and believes this could create some room for spending in emerging markets. The latter could benefit from improved terms of trade, wherein lower commodity prices result in improved real income growth.

When it comes to South Africa, Kamp says that the current account deficit is likely to shrink either through rising corporate savings or lower investment spending. “There are some structural supports for private sector fixed investment but it is likely to slow. In fact we are already seeing evidence of this in the Bureau for Economic Research survey for the manufacturing sector,” he adds.

His prediction for GDP growth this year is 3.5 percent and 2.5 percent during 2009, with the risk that it will be even lower. “These figures mask a sharp near-term slowdown and that third quarter growth numbers are likely to surprise on the downside,” he concludes.