Economic insight : the good, the bad, and the ugly

Well, we are all in a better place than where we were last year and the years before that. Europe is still alive, the Greeks (and others) have not sunk and are paying their debts. The USA did not enter a "double dip” recession, and China is still with us and growing, although at a lower rate. This is indeed a happier world than a few years ago!

But, before we start to celebrate, the only reason why we are in a better place now, is that the world was truly an awful place then. The world is still in a relatively poor space, especially developed markets. We will feel the lingering impact of the global financial crisis for many more years, in the form of lower growth in the developed world.

The economy in the USA, in particular, has exceeded (very modest) expectations. The next real challenge is, however, upon us. The dreaded tapering is about to start! In plain language this means that the massive volumes of ‘free’ money is about to be withdrawn. This

free money saved us all a few years ago, but it is unsustainable over the longer term. So, we are now returning to a more normal state of affairs in comparison to the current, very abnormal, state of affairs. The big question is: what will happen?

Frankly, nobody knows. The world has never seen such a push by central banks and governments to save the world’s economy.

A few things are relatively certain, however. This is very bad news for bonds/property and all other currencies, except the US$. This withdrawal also cannot be good news for financial markets in general.

Europe has clearly survived the worst. Markets have accepted that Germany has the means and political will to ‘save’ Europe and the Euro, and the situation has returned to a more stable state.

The elephant in the room is China. There are problems in their version of the microloans industry and their property market. The saving grace for China is that overall debt levels are not crippling like in the developed world. Consumers have very low overall debt levels.

Growth should change from capital investment growth to consumption growth as the economy starts to mature. China should continue to grow at a reasonable rate, but the next year could hold a few scare stories about the growth rate. Be prepared.

Regrettably, our economy is not in good shape. The downturn in the commodity cycle (Chinese growth slowing) and the current account deficit have severely affected us. The only short-term balancing factor is rand weakness. It is upon us! The current turn for the worst is

due more to global factors than domestic issues, but we have not enhanced our reputation!

All is not a disaster. The weak rand will virtually ensure higher inflation for a while, but exports will recover, imports will drop and the rand will most likely stabilise and strengthen eventually. Growth domestically will be poor for a while and the ability to generate jobs virtually does not exist. But as long as Chinese growth materialises, the outlook for SA will improve.

The Government’s finances, while they have deteriorated over the last few years, are not a real concern. We entered the global financial crisis in a very good condition and we have survived better than most countries. What we need now is some form of Government/labour/

civil society/business collaboration to lead us forward. However, our problems are deeply entrenched and very difficult to solve and we will continue to bumble along, putting out fires as they arise, and sadly, not reach our true growth potential.