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Jun 12, 2012

Advanced economies holding back global growth

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Nedbank Group Economic Unit Senior Economist Nicky Weimar discusses South Africa's positioning in the upcoming European recession. Camerawork: Nicholas Boyd. Editing: Darlene Creamer. Recorded: 12.06.2012
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Advanced economies were holding back the global economic recovery with slow, staggered growth, a loss of momentum and a possible fall back into recession in Europe, said Nedbank Group economic unit senior economist Nicky Weimar on Tuesday.

Since the financial recession in 2008, global economic growth has been slow, weak and “frustrating”, she said, adding that Europe was expected to enter another recession during the third quarter of 2012.

Speaking at an economic breakfast, in Sandton, on Tuesday, Weimar said staggered growth in the US, Europe and other advanced economies, accounting for 19%, 14% and 18%, respectively, of the world’s production, had stunted consumption of production on the back of debt, uncertainty and lack of confidence.

South Africa’s growth was a function of what occurred internationally and emerging economies, which accounted for 49% of the world’s production, relied on advanced economies as the bulk consumer.

Europe remained a major trading partner for South Africa, with 70% of South African CEOs canvassed in the Merchantec CEO Confidence Index, published on Tuesday, indicating that their business was more affected by economic conditions in Europe than those in China.

While parts of the US economy look stronger, confidence was lagging with State debt at 106.6% to gross domestic product (GDP) remaining high, and the country’s residents refraining from spending in a constrained labour-tight environment.

Many countries still held high and unsustainable government debt. Greece reached a ratio of 135.2% to GDP, other advanced economies recorded a debt of 106.5% and Brazil held 65.1%. South Africa was currently holding a debt ratio of 40%, while China and Indonesia had 22% and 23.2% respectively. Weimar said that no nation should move past 60% of a debt to GDP ratio.

Further, household debt levels, while easing, were still high, particularly in the US and the UK, at 110% and 170%, respectively, of disposable income – a healthy ratio of debt to disposable income was 60%.

Recovering economic growth did not mitigate the debt created by governments to emerge intact out of the recession. Weimar said the strength of recovery was too slow to make a dent in the debt and investor confidence in bouncing back was overestimated.

In Europe, only two countries reached growth levels above their position when recession hit, namely Germany and France, while the remainder of the European countries continued dipping into recession and remained below their growth potential.

Subpar growth was also expected for other advanced economies for many years to come, said Weimar.

South Africa experienced a slow, “patchy” growth, but exports remained far below the level on which it entered the recession. The expected European recession would further strain exports during 2012.

South Africa’s growth slowed to 2.7% in the first quarter, from 3.2% in the final quarter of 2011, hit by a sharp contraction in mining.

Edited by: Mariaan Webb
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