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Has the economic bailout worked?

08 May 2009 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Governments around the world have thrown billions of dollars at their respective economies to stave off the recent global financial contagion. You need only turn to America to appreciate the extent of the malaise. From peak to trough the US S&P 500 Index

Shell-shocked consumers have reacted to this wealth decimation by changing their collective behaviours. They’ve morphed from a massive spending force that underpins GDP growth to a group of debt-reducing savers. Ordinarily governments would welcome the change; but the world is in recession. And the only way governments know to get out of recession is by spending.

The doomsayer’s leper-like existence

Ironically, savings can exacerbate recession. This was one of the realities shared by StanLib economist, Kevin Lings, at a media presentation in Johannesburg recently. As consumers “cleanse, clean-out and consolidate” their financial positions they stop buying goods and services. That’s why regulators in the US are facing a huge dilemma at the moment – there’s a contradiction between their recession busting policy and the self-preserving actions taken by consumers. There are already signs that South Africa is suffering similar consequences. Although we’re not likely to move to a net savings position, spending is tapering off as consumers struggle to sort out their debt. And that means less demand across a range of sectors!

Consumers make up a huge slice of any country’s GDP. In Western economies the hunger to ‘get ahead’ results in consumers spending above their means. In the US the growth in household debt outstripped growth in household income as far back as 2000. And since that date the doomsayers have been predicting the economic meltdown we’re currently experiencing. Of course these predictions were dismissed as crazy ramblings and the orators cast leper-like from mainstream economics. And by the time their prophecies proved true it was too late.

Even after the first sub-prime issues blighted the American corporate landscape the country totally ignored the looming crisis. US manufacturers persisted with their ‘boom time’ production schedules despite signs of flagging sales and mounting inventories. By the time they realised the extent of the consumer slowdown they were facing massive overstock situations. They had to stop production by switching off the plants and retrenching thousands of staff. It’s against this backdrop of rising unemployment, declining consumption expenditure and plummeting manufacture that world governments set about implementing a workable rescue plan.

The foundation is in place

The rescue package will demand a heavy toll from future generations. The US Federal budget deficit has already spiked to $1trn and could reach $1.7trn in a matter of months. We expect the US taxpayer will have to dig deep when the economy recovers. Similar demands will be made on taxpayers around the globe. Although the UK dropped VAT early in the crisis they’ve since increased the marginal tax rates for top income earners in an attempt to swell their coffers. But they’re probably better off paying more tax tomorrow than starving today!

Lings believes the “phenomenal policy response” has done enough to return stability to the global financial system. He says there’s been a marked improvement in StanLib’s Economic Crisis Monitor since March this year. This monitor, which assesses global economic performance in 15 key areas, shows “real tangible net improvements.” The combination of interest rate stimulation, fiscal spending, financial support packages and the IMF and G20 collaboration has thus laid a foundation for recovery.

Lings points to the 28% improvement in the S&P 500 since 9 March in support of this conclusion. But for real economic recovery to take place we need this financial stability to grow into a full blown economic recovery.

Waiting for signs of economic recovery

“The world is not recovering yet,” says Lings, pointing to dismal export numbers in dominant economies like China, Germany and Japan. StanLib has created a second monitor called the Economic Recovery Monitor to measure real economic activity for signs of a turnaround. They’re going to look for improvements in employment numbers, manufacturing, export numbers and commodity prices (among others) in coming months. Provided US consumer data and new jobless stats improve Lings expects the worst is already behind us.

“The single biggest risk to the world economy is unemployment,” says Lings. The US has been shedding jobs at an unprecedented rate and he says if unemployment goes to 10% the world’s superpower will be unable to stave off a depression. If this happens the rest of the world will quickly follow suit.

Editor’s thoughts:
While investors keep piling into shares the news from certain sectors of the economy remains gloomy. Motor vehicle manufacturers are particularly downbeat after April new vehicle sales statistics reflect the largest year-on-year decline on record. Do you think the recent spike in share prices is enough proof that the economy is improving? Add your comments below, or send them to gareth@fanews.co.za

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