The Effect of Europe’s Financial Crisis on South Africa
The European financial crisis still poses a very real threat to the South African economy and even the most optimistic scenario for Europe translates into bad news for South African trade with Europe.
For this reason the outlook for the South African economy benefiting from European trade is dampened unless new strategies for growth are initiated and alternate trading partners are found.
European countries purchase a third of all South Africa’s manufactured exports and despite positive developments, the Eurozone economy is still expected to experience a recession this year in the face of widespread fiscal austerity and tight bank lending conditions. Therefore the demand for South Africa’s exports will continue to decline.
The problems originated partly due to a balance of payment difference within the Eurozone between the northern and southern countries. The decrease in competitiveness of the southern European countries, such as Spain, Italy, Greece and Portugal, resulted in balance of payments deficits which had to be funded by borrowing from the northern European countries such as France Germany and the United Kingdom.
Under normal circumstances the balance of payment deficit would merely result in an exchange rate depreciation. However in the Eurozone this is impossible due the single currency.
Therefore, a more complicated solution of internal devaluation was developed. This involves reductions in costs and expenditure for the southern European countries and an increase in consumption of southern European goods by northern European countries to correct this imbalance. The result is less demand for South African goods.
Asia’s rapidly expanding economies will still, without a doubt, provide the most important source of demand for local exports in the upcoming years. However, this consists mainly of demand for commodities and raw materials and not manufactured goods, putting a strain South Africa’s manufacturing sector.
On the other hand opportunities exist for South African manufacturing companies to market their products to African nations. Growing exports to the rest of Africa will help mitigate the lack of demand for manufactured goods from Europe.
Currently the demand is not sufficient and a more concerted effort is needed to adapt local products for these markets and other developing countries.
Exports account for 19% of SA’s gross domestic product, making the economy heavily reliant on local consumption. Currently the domestic economy is characterised by rising inflation and slowing growth, a difficult combination for policy makers to deal with.
However the South African government has shown that they are ready to take action to cushion the economy against the current global economic slowdown. The current policies and the national budget are geared towards creating an environment conducive to growing the economy. To make these plans effective, greater controls need to be put in place on government spending to ensure the effective use of these funds.
South Africa should be able to avoid entering another recession, along with Europe, provided the correct controls are put in place and concerted efforts are made to continue growing the demand for locally produced goods in creating new export markets.
