The three pillars of economic recovery
The US leading economic indicator is ‘up’ six months in a row. Analysts say this indicator is an extremely accurate predictor of economic turnaround, as demonstrated by the 3.5% US GDP growth posted in Q3 2009. Although we have to wait until 24 November for a more accurate “second” estimate it seems the US is definitely on the road to recovery. What does this mean for South Africa? We already know the South African economy mirrors fortunes in the developed world. This economic correlation is aptly demonstrated in equity markets where the JSE All Share index has matched US equities point-for-point since March 2009.
Governments have spent billions to bolster financial system liquidity – and taken unprecedented monetary policy decisions – to bolster the economy. The foundations for long-term economic recovery are in place. As we adjust to the post-crisis world the biggest challenge “is how [governments] take their feet off the accelerator without stalling economic recovery,” said StanLib economist, Kevin Lings. He was addressing journalists at a StanLib economic update hosted at Melrose Arch on 4 November 2009.
Lings identified three economic measures introduced by the US and other governments to rescue their respective economies. He reckons the recovery will be irreversible provided it continues after these pillars are removed.
1. Interest rates at rock bottom
The first economic support pillar is interest rates. The monetary policy response to the sub-prime crisis was to cut interest rates to historically low levels. As economies show signs of emerging from recession the central banks have to start thinking about returning interest rates to more appropriate levels. Sustained growth isn’t possible when interest rates and inflation tend to zero. Australia – one of a handful of countries not to post two consecutive quarters of negative GDP growth through 2008 – has already hiked interest rates twice this year. Israel and Norway followed Australia’s lead, hiking their core interest rates too. The minute the US, UK or Japan raise interest rates we will know the economic recovery is truly underway. Why? Because authorities will only take this step if they’re confident their economies can handle it!
2. Is five trillion dollars enough
The second economic support pillar is the cash provided by governments to avert a financial system meltdown. Governments around the world provided in excess of $5trn in additional liquidity. Lings believes the US stimulus was misdirected. Instead of facilitating credit to small businesses and consumers the money was sucked up by deposit-taking institutions. US banks might be well capitalised, but the ‘excess reserves’ entry in their annual financial statements is courtesy the US taxpayer! In the interim the US consumer remains a net saver, contributing little to the domestic economy. The recovery will gather momentum once banks redirect these funds.
3. Surging budget deficits
The third economic support pillar is surging budget deficits. Propping up the global financial system didn’t come cheap. As a consequence of ‘ramping up’ government spending, the US Federal Reserve faces an escalating budget deficit. This number reached 10% of GDP in Q3 2009 and could spike as high as 13% early in 2010. “All countries around the world are following this path,” said Lings. The proverbial ‘accelerator’ is pressed to the floorboards. Provided there’s gas in the tank these economies will press forward; but at some stage governments will have to step back and allow the private sector to fulfil the spending mandate…
A ‘smoke and mirrors’ GDP improvement
Lings’ main concern with the recent economic upturn – as demonstrated by the 3.5% Q3 2009 US GDP growth – is that the improvement is largely artificial. Much of the turnaround can be ascribed to direct government intervention and non-recurring post-crisis events. Lings mentioned the ‘cash for clunkers’ programme which inflated US vehicle sales through Q3, but cost government $3.5bn. As soon as the subsidy was removed vehicle sales plummeted. Another big slice of GDP growth was due to changes in US inventories – the manufacturing sector has stopped depleting inventories rather than producing more. Positive developments in housing, exports and industrial production can be dismissed as improvements from extremely low bases while industrial capacity utilisation is at the lowest point since the measure was introduced.
The real bugbear in the US recovery is US monthly payroll data. The world’s largest economy has shed seven million jobs since it entered recession in November 2007, and continues to cut around 200 000 jobs per month. “Consumer confidence has hiked up from its low point, but it hasn’t kicked on,” says Lings. This is a reflection of the dire employment situation facing the US! Payroll data due later this week will show another 160 000 job losses for October while the US unemployment rate will creep close to the dreaded 10% mark.
Editor’s thoughts:
On many economic measures South Africa Inc is in a better position than the United States. Unfortunately we lag the powerhouse economy where employment is concerned. South Africa shed 770 000 jobs in the last 12 months with close to 25% of our workforce unemployed. Do you agree that unemployment is the root of all of South Africa’s social ills? Add your comments below, or send them to [email protected]
