THERE WERE WIDE­SPREAD

Finweek English Edition - - Inthespotlight -

but fool­ish claims over 2007/2008 that the global econ­omy had sig­nif­i­cantly “de­cou­pled” from the United States. Even the tra­di­tion­ally cau­tious In­ter­na­tional Mone­tary Fund and the World Bank got into that act. That meant, this view urged, that eco­nomic slow­down in the US – in­clud­ing tech­ni­cal re­ces­sion, if it hap­pened – would have only mod­est ad­verse ef­fects on the rest of the world.

In other words, the tra­di­tional adage that “when Amer­ica sneezes, the world catches cold” sup­pos­edly no longer ap­plied. Global growth was now pri­mar­ily driven, it was urged, by China, In­dia, Rus­sia and other emerg­ing mar­ket na­tions in tan­dem with the Euro­pean Union. Ja­pan was largely and ab­surdly left out of the whole de­bate.

In this col­umn I re­peat­edly warned that ver­sion of “new eco­nomics” had ma­jor weak­nesses. Events are now bear­ing out that reser­va­tion al­most daily. Re­al­ity is that the global econ­omy gen­er­ally – no mat­ter that some coun­tries are still grow­ing strongly – re­mains ap­pre­cia­bly de­pen­dent on de­vel­op­ments in the US. That clearly has vi­tal im­pli­ca­tions for the out­look for SA.

A re­port in The Times of Lon­don on 12 Au­gust noted: “Met­als prices tum­bled yes­ter­day, lead­ing a broad-based sell-off across com­mod­ity mar­kets as fears of a global eco­nomic slow­down and the resur­gence of the US dol­lar vexed in­vestors.” It added: “Hav­ing risen re­lent­lessly for months, prices of key met­als went into an abrupt re­treat, fu­elling spec­u­la­tion they could suc­cumb to a sus­tained de­cline.”

A core para­graph in the re­port noted: “ The broad slide in prices across met­als mar­kets came as anx­i­eties of badly fal­ter­ing ac­tiv­ity in the Eu­ro­zone and ner­vous­ness that buoy­ant emerg­ing mar­ket economies could also now suf­fer a slow­down, fu­elled wor­ries that weaker global growth would un­der­cut pre­vi­ously boom­ing de­mand for com­modi­ties.”

The news­pa­per’s eco­nomics colum­nist, Rose­mary Righter, picked up fur­ther on that theme. She ob­served: “Euro­pean an­a­lysts have been so fix­ated by Amer­ica’s tra­vails that they’ve barely no­ticed how rapidly busi­ness ac­tiv­ity and eco­nomic sen­ti­ment were col­laps­ing across the At­lantic.” Righter con­tin­ued: “The signs were there for all to read. Europe is head­ing into a re­ces­sion from which it will strug­gle to re­cover, while Amer­ica may have got away with a rel­a­tively mi­nor con­trac­tion from which it may re­bound sooner than ex­pected.”

But what about the rest of the world, other than the US?

Mal­colm Moore com­mented in the Lon­don Daily Tele­graph on 13 Au­gust: “Ja­pan’s econ­omy is flirt­ing with its first re­ces­sion in six years. A strong fall in con­sumer spend­ing and a cut­back in pub­lic works projects re­sulted in a 0,6% con­trac­tion in the world’s sec­ond-largest econ­omy from April to June. The news could in­di­cate that Ja­pan’s six-year growth spurt has come to an end be­cause of the surge in food and en­ergy prices.” For­tu­nately, how­ever, Moore con­tin­ued: “Economists say any Ja­panese re­ces­sion is likely to be short-lived.”

Ju­lian Jes­sop, chief in­ter­na­tional econ­o­mist at Bri­tish-based Cap­i­tal Eco­nomics, ad­vises: “The Ja­panese econ­omy should be among the first to re­cover as the in­ter­na­tional in­fla­tion shock re­cedes later this year.”

How­ever, Bank of Eng­land Gov­er­nor Mervyn King says 2009 will be “painful” for Bri­tain as ma­jor set­backs are still be­ing seen in the hous­ing mar­ket and the in­crease in the cost of liv­ing heads to 5%.

Roger Boo­tle, MD of Cap­i­tal Eco­nomics, of­fers his view on that. “If you hear some­one say­ing that what’s gone wrong in Bri­tain is merely ex­cess lend­ing in the US subprime mar­ket, buy them a cool, re­fresh­ing drink – and pour it over them. The cur­rent Bri­tish ills are pri­mar­ily the nat­u­ral and in­evitable re­sult of the mam­moth bub­ble in the hous­ing mar­ket in this coun­try, as well as in­ter­na­tion­ally.”

China is still hold­ing up well, as we might ex­pect. But there’s no way its econ­omy has the mus­cle to act as lead lo­co­mo­tive for the world gen­er­ally. In­deed, as eco­nomics con­sul­tant Kevin O’Brien sug­gests: “The sig­nif­i­cance of the neg­a­tive short- and medium-term US eco­nomic out­look is es­pe­cially trou­bling to China’s ex­port sec­tor, which is the main hard cur­rency earner for the Chi­nese gov­ern­ment. As US con­sumer spend­ing con­tin­ues to re­treat, the eco­nomic ef­fect is an­tic­i­pated to pro­duce se­vere struc­tural pres­sures on China’s ex­port-driven do­mes­tic econ­omy.”

Lon­don’s Fi­nan­cial Times re­ports: “In­dia’s econ­omy is ex­pected to grow 7,7% in the year to March 2009 – cool­ing from the year be­fore and less than a re­cent fore­cast from the na­tion’s cen­tral bank. That’s now the fore­cast of the In­dian gov­ern­ment.” All that means: The world is still greatly re­liant on the US econ­omy. The US econ­omy has been hit more by oil and food price shocks than the subprime credit af­fair. SA can grow only mod­estly – as­sum­ing on­go­ing do­mes­tic so­cioe­co­nomic poli­cies and po­lit­i­cal un­cer­tain­ties – un­til there’s a big change for the bet­ter in­ter­na­tion­ally.

HOWARD PREECE howardp@fin­week.co.za

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