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Jan 23, 2009

How will SA’s real economy perform as global economic tsunami pounds?


The year 2009 has arrived on the wings of the storm. “

The situation is dire, it is deteriorating, and it demands urgent and dramatic action,” said US President Barack Obama shortly before his inauguration.

It has been estimated that nearly $7-trillion (yes, trillion) of wealth was destroyed on US stock markets last year, from relentless declines in the values of stocks.

This estimate comes from American analyst Jeremy Payne, who is a senior vice-president at S&P Capital IQ, a market research and analysis company.

He further estimates another $5-trillion in share price losses outside the US, and some $10-trillion lost in the global housing market.

“We’re probably looking at $25-trillion worth of asset price deflation,” he told the Washington Post.

The World Economic Forum (WEF) estimates that, worldwide, stock markets dropped by an average of 50% last year, and cautions that the decline could continue.

In the 12 months from December 2007 to November 2008, 2,6-million Americans lost their jobs, the largest decline over such a period since the aftermath of the Second World War.

The iconic Big Three American automotive manufacturers, General Motors (GM), Ford and Chrysler, are in deep to dire trouble – car and light truck sales fell by 18% in the US in 2008. GM and Chrysler are now living on money borrowed from the federal government, each being the beneficiary of $4-billion in emergency loans, while Ford has a $9-billion credit line to guard against deteriorating market conditions.

“We think that the market is going to continue to contract, at least in the first two quarters,” said Ford CE Alan Mulally at last week’s Detroit Auto Show. Significantly, Ferrari, Infiniti, Land Rover, Mitsubishi, Nissan, Porsche, Rolls-Royce and Suzuki did not attend this year’s show, while Honda cancelled its press conference and Chrysler scaled back its activities.

The US central bank, the Federal Reserve, has cut interest rates to, effectively, zero, in an attempt to head off the threat of deflation. Obama’s planned two-year $775-billion stimulus package will probably turn into an at least $1-trillion injection. Little wonder that US economist Irwin Stelzer quipped that “trillion is the new billion”.

Speaking to The Times of London, Yale University economics professor Robert Shiller warned: “We could have many years of a very weak economy. Big recessions are followed by years of weakness and, typically, unemployment keeps rising. To say that this will last years is not a dramatic state-ment. What is happening now is much worse than in 1990. We could be facing a decade of real weakness. This is no ordinary recession.

“There are signs people see this as a different story. People are talking about a depression, something that we haven’t seen previously . . . People have lost a sense of confidence, a sense of trust, in institutions and in each other.”

In Britain, the National Institute of Economic and Social Research has estimated that the UK economy contracted by 1,5% in the last quarter of last year, the worst performance in 28 years, and warned that the country’s economic downturn was getting worse. The Office for National Statistics has revealed that UK manufacturing output was dropping at its fastest pace since 1981.

The British Chambers of Commerce (BCC) last week released a survey of nearly 6 000 companies, employing 680 000 people, covering the last quarter of last year, which concluded that it “is clear that the UK economy is facing a very serious recession, and the downturn is deepening at an alarming pace”.

“The results highlight a frightening deteroriation in the UK economic situation.”

BCC director-general David Frost asserted that the results of the survey were “truly awful . . . with the scale and speed of the economic decline happening at an unprecedented rate . . . The sheer scale of this comes as a surprise to many of us.”

BCC chief economist David Kern estimates that the British economy will contract by 2,9% this year; he had earlier forecast a contraction of 2,2%.

The Bank of England has cut interest rates to 1,5%, the lowest in the institution’s 315-year history. There is speculation that the Federal Reserve and the Bank of England may both increase the money supply – by printing more notes – to head off the perils of deflation.

Germany fell into recession in the second half of last year. German exports fell by 10,6% in November, while industrial orders dropped 27% year-on-year. It is feared that this will be the worst recession to hit the country since 1945.

Regarding the Eurozone (that is, those countries which use the euro as their currency), in general, it could very well see a contraction of 3% this year – the same average as these countries suffered in 1930, at the start of the Great Depression.

The WEF predicts that China’s economic growth could slow to 6% this year, and that it might not have been much higher last year – in sharp contrast to the 11,9% growth in 2007. This would represent the slowest growth for the Asian giant since 1990. On a year-on-year basis, Chinese exports fell 2,2% in November and another 2,8% in December (although this latter figure was better than many economists expected: it was widely feared that the decline would have been 4%), while imports fell 17,9% in November and 21,3% in December.

The Organisation for Economic Cooperation and Development predicts that 34 out of 35 major developed and emerging market economies it analysed, including the seven biggest developed economies and China, India and Russia, would suffer strong deceleration in the first six months of this year. The exception, Brazil, will experience a light deceleration.


South Africa cannot escape unscathed from such a global crisis. But what will the impact be on the country’s real economy?

“We already faced a pre-existing slowdown in demand within South Africa, and we are now confronted by an additional and dramatic slowdown in the rest of the world,” points out Economterix senior economist Tony Twine.

“Prior to mid-2008, we were struggling to sell industrial output to South African end- users. Now we’re struggling to sell it to anybody. Although most statistics for the fourth quarter of last year are not yet available, commodity prices – both primary and secondary (intermediate goods like steel) – showed heavy falls in October and November. “That’s a clear barometer of how these sales are going.”

“South Africa has been in a slowdown for the past one-and-a-half years, due to high interest rates,” highlights Investment Solutions chief economist Chris Hart.

“The international credit crunch has transformed the outlook from a soft landing for our economy to a moderately hard landing. The economy is likely to face a recession, which was not on the cards before, but it is not likely to be deep or prolonged.”

“Regarding gross domestic product (GDP), we expect a growth rate for this country of around 0,5% for the last quarter of 2008 and the first quarter of 2009. Then it could possibly go negative in the second quarter of this year, but become positive again in the third quarter so, technically, there would not be a recession,” forecasts Efficient Group economist Fanie Joubert.

In addition to companies being hit by the fall-off in demand, they are also being hurt by the lack of easily available credit, a fallout of the global banking crisis late last year, which saw a number of leading banks effectively nationalised in the US, the UK, and the Eurozone, as part of emergency measures to avert the collapse of the global financial system. Although the local financial system remains sound, the global crisis has had an impact.

“Credit is still available in South Africa, but the conditions are now much more stringent. This affects a company’s working capital. It also affects consumer credit, that is, their clients’ ability to buy their products. And international trade finance is not as easily available,” explains Hart.

It is true that the rand has weakened against the major currencies, but, Joubert cautions, this advantage for local exporters has been greatly reduced by the fall in overseas demand.


All three economists agree that manufacturing and mining will be the sectors most affected by the global downturn. “Within manufacturing, the latest statistics show dips in output in the automotive, petroleum and chemicals, and iron and steel, industries,” cites Twine.

“Basically, the manufacture of intermediate goods as well as final, luxury products from the automotive sector. While the effect of the global recession is likely to be broad and affect all local manufacturing over time, these sectors are the ones showing the earliest strain.”

Hart identifies the automotive and base- metals-mining as well as the mining engineering services sectors as those that will suffer the most. “The food processing and suchlike sectors are likely to be relatively unscathed, while gold-mining may even receive a bit of a boost.”

Joubert adds the wholesale and retail trade, and hotels and restaurants (14% of the GDP basket) to the sectors most at risk. “Also, the electricity, gas, and water sectors are already in recession. There is also a big question mark over finance, business services and real estate.

“These three are equivalent to almost 20% of our GDP basket. Although they are hanging on quite well, overall, real estate is struggling while business services are still doing well. The future of the financial sector is unpredictable. It could swing it either way.”

But while manufacturing and mining are struggling, or under threat, other sectors of the economy are doing very well, particularly construction and agriculture. Construction continues to benefit from infrastructure projects which are part of, or stimulated by, the 2010 FIFA World Cup, such as the construction of stadiums and the extensive upgrading of highways and other roads, as well as the Gautrain project.

And even for the worst affected sectors and enterprises, the good news is that they are probably only going to have to endure their afflictions for a matter of months, not years.

“South African domestic demand is likely to turn upwards in the second half of this year,” forecasts Twine, “although the rate of this upturn will be partly determined by the state of the global economy.”

“The global downturn has triggered the start of a rate cutting cycle in this country, and inflationary pressures have eased off quite a lot,” stresses Hart.

“We’re likely to see continued interest rate cuts, which will help set a platform for economic recovery later this year.”

He points out that the recession in this country is cyclical, not structural, whereas in the developed world it is structural, not cyclical. Moreover, there is the question of global investment flows over the coming months, which, he argues, will benefit countries like South Africa.

“I believe we are going to see strong investment flows from the developed world to emerging markets, as investors seek to escape 0% interest rates and 0% growth – or negative growth – environments. Only in emerging markets will they find growth and yield.”

“We foresee a mild recovery in the second half of this year,” concurs Joubert. “For 2009, as a whole, we expect a GDP growth rate of 0,5% to 1,0%. This is, however, a much slower growth rate than what we have had in recent years.”


For the developed world, however, the outlook remains bleak. “Looking at the Group of Eight countries, most analysts expect a 0% growth rate for this year,” says Joubert. “Economic data from the US and the Eurozone is very disappointing. Confidence is being eroded. I don’t expect a sudden recovery in those economies.”

“I think that the recession in the developed world, because it is structural, will prove protracted and last beyond 2010,” affirms Hart.

“I would not be surprised if the global recession continues into 2010,” adds Twine. “I think developed countries are going to be in demand-side trouble all this year and, it is strongly possible, into 2010 and, perhaps, even into 2011. Another 12 months of recession in the developed world is definite, 18 months is probable, and 36 months is possible.”

“I can only imagine that all the stimulus packages that have been, and are being, announced in the US, the UK, and the Eurozone must have an effect, and sooner rather than later,” states Joubert. “But when? That’s the question. But we would all be much worse off without them.

Edited by: Creamer Media Reporter

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